Insurance Premium Tax (IPT) will rise from 10 to 12 per cent in June, as announced by the Chancellor in the Autumn Budget Statement. This increase will surely dismay consumers and insurers, because this is the third hike in Insurance Premium Tax(IPT) in less than 24 months. Introduced in 1994, IPT is a tax levied on general insurance premiums including home insurance, motor insurance, accident, sickness and unemployment insurance, travel insurance etc. There are two rates, a standard rate of 10% (which will rise to 12% in June) and a higher rate of 20% which is applicable for travel insurance, electrical and mechanical appliance insurance and some types of car insurance.
Hidden tax on consumers?
The purpose of the last IPT rate hike was to generate money for the Treasury to fund infrastructure spending. The Treasury has estimated that the 2 per cent increase in IPT will add about £ 680 million to the exchequer and about £ 4 billion over the next 5 year period to fund the Government’s spending commitment. But this has resulted in the cost of insurance for the average consumer going up. The Chancellor has asserted that, IPT is a tax on insurers and not consumers; the insurers will decide whether to pass the cost to consumers or not. Tax experts have opined that IPT is a hidden tax on citizens. In most cases, the higher IPT has been passed on to the consumers in the form of higher premiums.
Increase in overall general insurance cost
The Government claims that reforms to tackle exaggerated and fraudulent whiplash injury claims (that caused motor insurance premiums to go up for average consumers) will reduce the annual motor insurance premiums by around £ 40 per year for average consumers. While this is a welcome development for motorists, the increase in IPT generally will almost certainly increase the cost of all general insurance products like home insurance, health insurance, pet insurance, accident, sickness and unemployment insurance. Some insurers expect, motor insurance premiums will go up on an average £ 25 per year. Increase in cost on account of higher IPT will offset the savings in premiums through Whiplash Reforms. Tax experts say that, consumers may see their overall annual general insurance premiums go up by more than £100 on an average. Consumers who are in lower income groups are likely to be the hardest hit by this tax increase.
IPT has doubled in less than 2 years
Many consumers complain about higher general insurance premiums. Increase in claims, including fraudulent ones, are one major reason for increases in premiums. Increase in IPT is another reason why premiums have gone up. IPT was 6 per cent in October 2015. From June 2017 it will be 12 per cent; more than double what it was less than 2 years back. Fortunately, the IPT was not raised for the third successive time in the March Budget, but tax experts do not rule out further increases in IPT in the coming years.
Being uninsured is a bigger risk
Some insurers fear that after the increase in IPT, there may be more motorists on the road without valid insurance. Unofficial data from some sources suggest that there may be already up to a million uninsured drivers on our roads. Though higher insurance premiums is a stress on disposable incomes, the risk of being uninsured is huge because it can put individuals and families in financial distress in the event of accident, sickness and unemployment. Unemployment due to health reasons is on the rise in the UK. According to a report published in the Independent, as many as 2 million people are unemployed due to long term illness. If we include the number of people who are unable to work due to short term illness or injury, the number will be much higher. Accident, Sickness and Unemployment insurance (ASU) is an important insurance requirement to protect you and your family’s lifestyle and assets in the unfortunate event of loss of income due to accident, sickness and unemployment.
If you want to lower your insurance costs you can visit insurance comparison sites and compare policies that meet your insurance needs at the lowest cost. At the same time, you should also give due importance to factors like claim settlement track-record and customer service experience of the insurer. If required, you should seek the help of a financial advisor to select the best insurance policy for your needs.