The Future of Insurance Premium Tax in the UK

Russell Brown
November 10, 2021

Although Rishi Sunak did not mention Insurance Premium Tax (IPT) in his budget on 27 October 2021, one of the consequences of the UK leaving the EU is that HM Treasury (HMT) are conducting a review of the Value Added Tax (VAT) treatment of financial services in the future, and this may have implications for the future of IPT in the UK. This review is very much at the planning stage and an agreement will need to be reached at a ministerial level on the objectives, scope, and any limitations to be placed on the review.

However, it already seems clear that one of the key objectives will be to look at the numerous VAT exemptions that are in place for financial services companies, including insurers, and how these can be tidied up in the legislation as it’s not always apparent how they can be applied in practice.

Could UK IPT be abolished and replaced by VAT instead?

Abolishing IPT appears to be something that has not been ruled out at this preliminary stage. It is arguable that such a move could on the face of it be attractive to the government. They could say that they’re streamlining tax regimes and making things more straightforward for taxpayers.

For VAT, there is the EU Sixth Directive from 28 November 2006 on the common system of value added tax that provides legislative framework and has been enshrined into UK law. However, there isn’t a similar EU taxation directive for IPT, so abolishing IPT in the UK and introducing provisions for taxing premiums into existing UK VAT legislation doesn’t appear to be so problematic.

However, there are several key considerations that need to be considered as part of this process:

  • Would the 20% standard rate of VAT be applied to most taxable, non-life insurance policies instead of the current 12% standard rate of IPT?

This is partly a political and financial decision. The increases to the UK IPT standard rate from 6% to 12% made between 2015 and 2017 did not bring in as much tax revenue as hoped. This is mainly because non-admitted, non-EEA insurers continued to not always pay the tax and the insured can only be assessed for it by HMRC under specific circumstances, which in practice rarely happens.

Replacing IPT with VAT could change this, along with maybe making policyholders liable to pay the tax if the non-compliant insurer won’t meet their obligations. On the other side, increasing the current tax rate by 8% would not be popular politically, especially if they’re trying to say that taxpayers won’t have to pay any more tax.

  • Could different tax rates be applied depending upon the type of insurance?

This could happen. The government could decide to keep a reduced rate of 12% for types of compulsory insurance that are needed by policyholders, such as motor and property insurance.

With the latter, this would take the pressure off people looking to get on the property ladder that need buildings insurance for a mortgage. It would also dispel the accusation that the government is pricing the poorer parts of society out of having property contents insurance, leaving them exposed to financial risks if something happens, particularly if they live in places at risk of flooding.

They could still charge 20% on other types of insurance that either do not have social implications or are clearly only sold to businesses such as Directors’ and Officers’ Liability.

  • How to treat supplies of insurance to customers who are not VAT registered?

The situation for customers that are VAT registered would be beneficial as they could recover input VAT on their premiums, which they can’t do with IPT as it is an irrecoverable cost for them. For non-VAT registered customers, the situation doesn’t change from before and they would likely have to pay more tax, unless insurers reduce their pre-tax premiums accordingly before they add VAT.

  • Could life and other long-term insurance products such as income protection and permanent health insurance of at least five years become taxable as they’re currently exempt from IPT?

As many of these insurance products are deemed to be lifestyle choices for the insured as opposed to compulsory, taxing them is a distinct possibility. This could perhaps be done by using a reduced 12% rate to avoid discouraging people from taking out such insurance.

  • Could insurers deal with the increased administrative burden because of any changes?

This is a difficult question to answer. Insurers have traditionally relied on brokers to ensure policies are taxed correctly, so it is likely that the burden of any administrative changes would need to gain approval from not only insurers but brokers too before they could be implemented.

It is interesting to note that in the HMRC consultation on “The operation of Insurance Premium Tax” (July 2019) and the follow-up exercise on “Insurance Premium Tax: Administration and Unfair Outcomes” (November 2020) that the IPT abolition question was not specifically addressed, but this may not mean that it is off the table.

What are the next steps?

HMT and HMRC will continue to liaise with insurers representative bodies such as the Association of British Insurers (ABI) and the International Underwriting Association (IUA) on what options they should explore further and what the potential financial implications are of any changes.

They will then move on to the next steps of having a consultation and arranging regular Industry Liaison Group meetings with interested parties including the ABI and IUA to progress matters. All of this will take time, so we are only at the beginning of this process.

Take Action

To find out more about the changing regulatory landscape download IPT Compliance Guide and follow us on LinkedIn and Twitter to keep up-to-date with regulatory news and updates.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.


Russell Brown

As senior consulting manager, Russell joined Sovos in 2021. A career spent in insurance premium taxes on global insurance programmes has given him many years of experience in handling compliance and advisory challenges from location of risk and IPT liability to co-insurance and financial interest clause cover. He has worked for financial service providers EY and TMF and more recently as head of indirect taxes at Tokio Marine HCC. He has been a member of both the ABI and IUA Indirect Tax Working Groups as well as being an active participant in regular Lloyd’s Indirect Tax Forums.
Share This Post
Share on facebook
Share on twitter
Share on linkedin
Share on email

North America ShipCompliant
August 16, 2022
Dispelling the Top 5 DtC Shipping Myths

Direct-to-consumer (DtC) alcohol shipping can at times seem convoluted and increasingly complicated. States continue to evolve their DtC shipping requirements, which can understandably create some confusion over what is and is not allowed. However, working with the right partner can help to clear up some of that confusion. Here are some of the top misconceptions […]

E-Invoicing Compliance EMEA VAT & Fiscal Reporting
August 16, 2022
VAT in the Digital Age: Mandatory E-invoicing in the EU

The European Commission (EC)’s action plan for fair and simple taxation – ’VAT in the Digital Age’- continues to progress. After a public consultation process, the EC has published Final Reports discussing the best options for the European market to fight tax fraud and benefit businesses with the use of technology. The areas covered are: […]

North America ShipCompliant
August 15, 2022
Compliance and Tax Considerations for Cider Producers

The summer months can be ideal for enjoying a hard cider, but it’s always a good time for cider producers to brush up on three-tier compliance rules. Before expanding into new markets, you must be familiar with the specific rules of each state. In this blog, we will cover the major regulatory and tax rules […]

August 10, 2022
Meet the Expert – Hector Fernandez, Principal Compliance Tax Services Representative

Meet the Expert is our series of blogs where we share more about the team behind our innovative software and managed services. As a global organisation with indirect tax experts across all regions, our dedicated team are often the first to know about regulatory changes and developments in global tax regimes, to support you in your […]

North America ShipCompliant
August 9, 2022
2022 Direct-to-Consumer Wine Shipping Mid-Year Report

A lot has changed in the direct-to-consumer (DtC) wine shipping channel since the January release of our Direct-to-Consumer Wine Shipping Report—changes in volume and value that have the market resembling pre-pandemic patterns. Note: The proprietary data featured in this mid-year report is compiled from an algorithm measuring total DtC shipments based on millions of anonymous […]