The Chancellor George Osborne’s decision to increase Insurance Premium Tax (IPT) was one announcement that was quietly slipped in to the July Budget. Quiet it may have been at the time, but one month on there is plenty being said. Here we take a look at some of the commentaries that have caught our eye, and offer a few opinions of our own on what has become a much-discussed topic.
From November 1 2015, Insurance Premium Tax will rise from 6 per cent to 9.5 per cent. As reported in The Telegraph, the rise will affect 20.1 million households with contents insurance, 19.6 million with motor insurance and 17 million with buildings insurance.
Other types of insurance affected are pet, mobile and private medical insurance. Travel insurance has been left out of the hike, which is just as well considering it already puts a 20 per cent tax on premiums. IPT is not charged on life insurance and various other types of cover. A comprehensive list can be found here.
Businesses will also be hit as commercial insurance, including liability cover, is included in the tax increase.
Who is Saying What?
The British Insurance Brokers’ Association (Biba) said it was ‘extremely disappointed’ in the decision describing it as a ‘stealth tax’ and with executive director Graeme Trudgill tweeting, “IPT up to 9.5% from November makes a mockery of the insurance growth action plan and efforts to reduce cost of motor insurance.”
The Association of British Insurers (ABI) was also much angered by the news stating that the rise could cost an average family an additional £100 each year. Commenting through the ABI blog, director James Dalton said, “Although the announcement of an IPT increase got the briefest of mentions in the House of Commons, it represents a very significant increase in the cost of insurance for millions of households and businesses. This makes it even more important than ever that the Government works with the insurance industry to reduce the underlying cost of insurance.”
The Driving Instructor’s Association (DIA) reported on its website at the end of July that the rise will trigger a surge in insurance customers moving to new providers and cutting back on or cancelling policies. The organisation said that a study from market research firm Consumer Intelligence revealed that 56% of customers will switch or consider switching, and 27% will cancel policies or reduce cover.
Personally, we don’t think clients will seek out alternative providers, as all UK insurers will be affected. Unless of course some of them decide to absorb the additional costs as a marketing ploy: for example, cash plan provider Health Shield has promised to cover the IPT rise for its corporate cash plans until 2017.
Over on the Money Saving Expert website, as you would expect, Martin Lewis was quick to issue advice on how to beat the hike with his key tip being to lock into quotes 60-90 days before the policy is due to commence. There was also a warning that administration fees, charged for things like updating address details, may rise as tax is also levied at this stage.
Helpfully, Allianz Insurance plc has informed us as to how the IPT increase will work in practice from their point of view.
They say that for new business and renewal transactions with an inception or renewal date that falls before 1 November 2015, the current rate of 6% IPT will apply. And for those with an inception or renewal date on or after 1 November, the new rate of 9.5% will be used.
For Mid Term Adjustments (MTAs) on policies incepted or renewed before 1 November, should a reduction in premium result then the refund amount will reflect the original IPT rate at 6% regardless of whether the effective date of the MTA falls before or after 1 November.
Should an MTA result in the need for an Additional Premium (AP) then the rate of 6% will apply if the effective date falls before 1 November, and 9.5% if it’s on or after 1 November 2015.
The Government reckons an additional £1.5 billion per year will be raised for the Treasury as a result of the IPT increase.
IPT was first introduced in October 1994. The last increase was in January 2011 when it rose from 5 per cent to the current 6 per cent. Whilst an increase of 3.5% is somewhat swingeing in comparison to the last one, there are a few factors to consider, and the Chancellor, as you can imagine, was keen to justify the move.
Mr Osborne pointed out that the tax is below that of other countries, that it would affect just one in five premiums and that the cost of household insurance policies is falling.
It is true that when first introduced, IPT was pitched at 2.5 per cent, with the intention of a gradual harmonisation with the higher rates charged by other EU countries. With four years since the last increase and no hike during the recent recession, it almost stands to reason that a fairly significant increase was on the cards.
Insurance rates generally, with a few blips here and there, have remained low since 2005. Our Lift Plan rates for example have remained at the same level for almost ten years. Provided rates do not start increasing at the same time as the IPT, we do not expect any serious problems.
It is possible however that there may be an increase in the near future in employers’ liability cover, as insurers are facing a levy against premiums to cover an anticipated rise in asbestosis claims. As soon as we have more detail on this, we’ll post a report on this blog.
All in all, tax increases are part and parcel of the economy. Obviously we would urge anyone to think very carefully before reducing or pulling cover altogether as a way of dealing with the IPT rise, as it could prove a false economy. Take advice before making any decisions.