The insurance premium tax rise - who really pays?

31 May 2017

This week on 1 June, the standard rate of insurance premium tax (IPT) rises from 10 to 12 per cent, prompting howls of disapproval from the industry who are claiming that a typical household stands to pay an extra £50 a year. However, a common myth is that the IPT is always passed on to the insured. In fact, consumers may not be as badly hit as some are predicting – at least for now.

IPT constitutes a cost which must be borne by one or more of the parties to the sale of an insurance policy, namely the insured, the broker or the insurer.

In fact, it is usual commercial practice for the IPT cost to be borne at least in part, by the insurer or broker.

In the case of the broker, this is because usually the broker will pay some or all of the IPT due on policies sold from its own commission rather than passing on the cost to the insured.

Alternatively, the agreed commission amount payable to the broker will be calculated to take into account the IPT amount payable by the insurer to HMRC.

There is some anecdotal evidence that brokers/insurers will pass on the additional IPT cost which results from the IPT rate rise to the insured. However, this may well not be the case.

Like any cost, the question of whether it is commercially viable to pass it on to the insured, is one which is dependent on a number of factors – including other factors which are also currently affecting the cost base. For example, while the statutory changes to the way that compensation awards for serious personal injuries are calculated will undoubtedly increase the insurer/broker cost base, the reforms to whiplash claims, and the increased use of telematics boxes, are likely to decrease it. It is quite possible therefore, that some insurers/brokers may choose to use savings from other areas such as these, to offset the increased IPT cost.

Alternatively, insurers/brokers may choose to explore the valuable IPT-saving measures contained in the IPT legislation, in more depth than previously, or to use more aggressive, longer-term marketing strategies such as charging ‘negative commissions’.

Finally, it should also be noted that the UK could, at some point, choose to introduce a system of different IPT rates for different insurance classes. These are already used in some other EU countries. This again could affect the extent to which the increased IPT cost is passed on to the insured.

It is therefore virtually impossible to predict how the increased IPT cost will be dealt with by insurers and brokers, and what the impact on consumers will be.

However, given the rate is still relatively low compared to some other key EU countries, what is more certain is that it is likely to continue to increase further over time.

For more information please get in touch with Justine McInnes, or your usual RSM contact.