This ‘stealth tax’ is costing responsible families more than £220 a year - here’s what you need to know

A so-called ‘stealth tax’ is costing hard working families a small fortune every year, a report claims.

The document, published by the Social Market Foundation (SMF), found that the Insurance Premium Tax (IPT) levied by the government costs each UK household around £223 each year.

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IPT - which is a tax on insurance products like car and home cover - is actually charged to providers, but critics say the brunt of it is passed onto customers in the form of higher fees.

The centrist think tank said that almost half (48 per cent) of IPT was paid directly by households on insurance products, and claimed that business costs associated with the tax are likely to “feed through” to families - through higher prices, lower dividends, and reduced profits for business owners.

‘Just for doing the right thing’

The report claims that lower income families are hit hardest by the tax, spending 4.1 per cent of their post-tax income on insurance, compared to 1.6 per cent for the highest income households.

SMF predicts that UK households will fork out £17 billion on IPT alone between 2019 and 2024.

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Huw Evans, Director General of the Association of British Insurers, said, “This new report clearly shows how regressive and unfair insurance premium tax is.”

Despite evidence that insurance companies actively try to pass on the cost of IPT to customers, Evans argued, “IPT costs hard-working families £223 a year, just for doing the right thing and buying insurance to protect themselves.

“Businesses and public bodies are also losing out as this tax damages their bottom lines. We urge the Government to cut this stealth tax in the March budget.”

A HM Treasury spokesperson said: “Insurance Premium Tax is targeted at insurers, not consumers.”

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What rate should IPT be set at?

SMF’s report also criticised the government’s handling of the tax, arguing that IPT has been raised without any consideration of its impact on household finances.

Introduced in 1994, IPT was initially set at 2.5 per cent, but now stands at 12 per cent - almost five times higher.

The Institute for Fiscal Studies suggested that the government had raised the tax (first in 2011, and then again in 2017) without proper consideration for its impact.

Paul Johnson, director of the IFS, argued that the rate of IPT should be a “low single digit”, in a 2016 article published in The Times.

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Which insurance risks are IPT exempt?

There are two separate rates of IPT, standard (12 per cent), and higher (20 per cent). Insurance products that are taxed at the higher rate include:

Travel insuranceWhite goods insuranceCar insurance

Most other kinds of insurance have an IPT rate of 12 per cent, unless they are specifically exempt from the tax altogether.

The following types of insurance are exempt from IPT:

Re-insuranceLife insuranceCommercial aircraft insuranceSpacecraft insuranceCommercial ship insuranceLifeboat insuranceInternational railway stock insuranceExport finance insuranceInsurance for commercial stock in international transitMotability insurance

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