In this article, you’ll get to know:
- What Is Insurance Premium Tax?
- How much is insurance premium tax?
- How is insurance premium tax calculated?
- How has IPT Expanded Over The Years?
- Reduce the IPT Amount that I have to pay
Let’s get into it!
What is Insurance Premium Tax UK?
Insurance Premium Tax (IPT) is an indirect government tax applied to most general insurance premiums in the UK, such as car, home, and pet insurance.
Since most insurance is exempt from VAT, the government uses UK Insurance Premium Tax to generate tax revenue from the insurance industry. It is paid by insurers, but almost always passed on to consumers within the total premium cost.
How Much is Insurance Premium Tax?
Right now, there are two main rates for UK Insurance Premium Tax. The standard Insurance Premium Tax rate in the UK is 12%, which applies to most types of insurance. However, certain types of insurance, such as travel insurance, are subject to the higher rate of 20%.
Here’s a simple breakdown:
- Standard Rate (12%): Applies to the vast majority of policies, including car insurance, home insurance, pet insurance, business insurance, and private medical insurance.
- Higher Rate (20%): Applies to travel insurance and to certain insurance sold alongside goods or services, such as mechanical or electrical appliance cover.
Some policies may also be completely exempt from Insurance Premium Tax UK. This includes life insurance, permanent health insurance (income protection), and commercial aircraft or ship insurance.
How Does Insurance Premium Tax Work?
When you pay for an insurance policy, the insurance company adds the IPT to the premium cost. This means that, as a consumer, you may not even realise that the tax is there unless you specifically look at your bill. The insurance provider collects the tax from you and then passes it on to HMRC.
The rate at which IPT is applied depends on the type of insurance policy. As mentioned earlier, most policies are subject to the 12% standard rate, while some policies qualify for the higher rate.
How is Insurance Premium Tax Calculated?
IPT is calculated as a percentage of the total insurance premium. The insurer calculates this based on the “gross premium” and adds it to the final price you see.
Example Calculation:
- If your car insurance premium is £400, and you’re being charged at the standard rate of 12%, the IPT would be £48 (12% of £400). This brings your total premium to £448.
- For travel insurance, if the premium is £100, it is charged at the higher rate of 20%. The IPT would be £20, bringing the total cost to £120.
Which Types of Insurance Are Exempt from IPT?
Luckily, not everything is taxed. The government leaves certain “long-term” or essential insurances alone to encourage people to protect their families and finances. You won’t pay any Insurance Premium Tax UK on:
- Life insurance: Protecting your family if you pass away is tax-free.
- Permanent health insurance: Often called income protection.
- Commercial ships and aircraft: These have their own complex rules.
- Reinsurance: This is basically insurance for insurance companies.
- Mortgage protection: It is only exempt where it is structured as a long-term life or permanent health insurance policy. Short-term mortgage payment protection policies are subject to IPT.
How Has Insurance Premium Tax Rates Increased Over the Years?
When IPT was introduced in 1994, the rate was just 2.5%. Over time, it has risen to 12% for most policies and 20% for specific ones. The last major increase to the standard rate was in 2017, and since then the rates have remained steady.
| Year | Standard Rate |
| 1994 | 2.5% |
| 1997 | 4% |
| 1999 | 5% |
| 2011 | 6% |
| 2015 | 9.5% |
| 2017 to 2026 | 12% |
How has IPT Expanded Over The Years?
The higher rate became effective in 1997 to address VAT issues avoidance, where organisations selling insurance with different products could misleadingly lessen the cost of that thing and expand the expense of the insurance.
The lower rate increased to 12%, however, the higher remained at 20%. It is being considered for the Budget every year, and when the tax is changed by the Government, it will, in general, happen too rapidly.
Effects Of IPT Rise:
At the point when the Government raises the tax, insurance suppliers pass this to their clients.
In some cases, you see for a brief time frame after a rate rise insurance organisations adequately decrease the premium cost so their clients don’t feel the increase in the tax. In any case, with this decrease in premiums for the client, a similar level of tax must be paid to the Government by the providers.
Reasons To Pay IPT:
The insurance provider has to pass the tax once the client has paid the premium. No matter if it’s 12% or 20% on the collected premium, it has to reach directly to the government.
Exemptions:
A few sorts of insurance are excluded from IPT, for example, life coverage, health care coverage, business crafts and ship insurance.
Reduce The IPT Amount that I have to Pay:
Assuming you need to lessen the tax you pay, you should see approaches to reduce your insurance premium. This could include:
- Fitting additional security provisions to your home or vehicle.
- Voluntary excess should be increased, however, keep in mind that you’ll be obligated for the additional expense in case you do have to claim.
- Paying your premium in one go instead of in regularly scheduled payments. This can lessen the general sum you pay during the year.
Why Do You Need to Pay Insurance Premium Tax?
You need to pay Insurance Premium Tax UK because it’s a legal requirement. Just like petrol duty or tobacco tax, it is a way for the state to generate revenue from services that are widely used.
Most people are legally required to have car insurance or choose to have home insurance. Hence, it is a very reliable way for the Treasury to collect billions of pounds every year.
Do I Have to Pay Insurance Premium Tax?
If you are buying a standard insurance policy in the UK, yes, you generally have to pay it. It is not an optional tax. If the policy is subject to IPT, the insurer is legally bound to collect it from you and pass it to HMRC.
The only way to avoid it is if the specific type of insurance you are buying is on the list of exemptions mentioned above. For the average person on the street, if you have a car, a dog, or a flat, you are paying Insurance Premium Tax UK whether you realise it or not.
Are There Any Other Exemptions for IPT?
Yes, there are a few niche ones. For example, insurance for goods being exported outside the UK is usually exempt. Also, certain types of medical insurance for people living abroad might not be subject to tax. Most notably, many disability-related vehicle insurances remain completely exempt from Insurance Premium Tax UK.
Which Types of Car Insurance Does the 20% IPT Rate Apply To?
Standard car insurance bought through a broker or a comparison site, is taxed at the 12% rate. However, specific add-on products like GAP insurance are subject to the 20% rate when purchased through a dealership.
The 20% Insurance Premium Tax (IPT) rate applies to:
- Supplier-Arranged Cover: This includes insurance for hired or leased vehicles arranged directly through a dealership or rental company instead of an independent provider.
- GAP Insurance from Dealerships: If you purchase Guaranteed Asset Protection (GAP) insurance from the motor dealer who sold you the car, it is typically subject to the 20% rate. If bought from an independent broker, the 12% rate usually applies.
- Rental Vehicle Insurance: Insurance sold by vehicle hire firms specifically for their rental cars.
- Mechanical or Electrical Breakdown Cover: The 20% rate applies to mechanical breakdown insurance (extended warranties) sold by dealers, while standard roadside assistance policies are subject to the 12% rate.
How Does IPT Affect the Price of Car Insurance?
Since IPT is added to your car insurance premium, it directly affects the overall cost. The higher the premium, the more you’ll pay in IPT. For example, if your car insurance costs £500, you’ll pay an additional £60 in Insurance Premium Tax UK (12% of £500), making the total cost £560.
How Can I Cut the Cost of Car Insurance?
Since you can’t get rid of the tax, you have to lower the premium it is based on:
- Increase your voluntary excess: This lowers the base price and the tax.
- Pay annually: This allows you to avoid interest charges on monthly instalments. Thus reducing your overall total cost.
- Shop around: Comparison sites are still the best way to find a lower base rate.
- Telematics: “Black box” insurance can lower premiums for young drivers, reducing the total UK Insurance Premium Tax paid.
Do I Pay Insurance Premium Tax (IPT) on Business Insurance?
Yes. If you buy public liability, professional indemnity, or office building insurance for your company, the 12% standard rate will be added to your premium. This is why business owners need to factor in an extra 12% for Insurance Premium Tax UK when budgeting for their annual cover.
This can be particularly tough for small businesses because, unlike VAT, you cannot “reclaim” the IPT you pay. It is a straight expense that hits your bottom line.
Is Insurance Premium Tax Like VAT?
In the way you experience it, yes. It is a percentage added to the price at the point of sale. However, for businesses, there is a massive difference. You can often “claim back” the VAT you pay on business expenses. But you generally cannot claim back IPT.
How Does IPT Compare to VAT?
While they are both “consumption taxes,” they work differently. VAT is currently 20% for most things, whereas the standard Insurance Premium Tax UK is 12%. Crucially, most insurance is actually exempt from VAT. IPT was created specifically because the government couldn’t easily charge VAT on insurance services.
| Feature | VAT | IPT |
| Standard Rate | 20% | 12% |
| Reclaimable? | Yes (for VAT-registered businesses) | No |
| Applies to | Most goods and services | Insurance premiums only |
| Who pays? | The end consumer | The insurer (usually passed to the consumer). |
Who Pays Insurance Premium Tax?
Technically, the “taxable person” is the insurance company. They are the ones who have to register with HMRC and file the returns. The law allows them to pass this cost on to the policyholder. So, although it is the insurer that writes the cheque to the Government, the funds come from your bank account.
Can I Claim Back My Insurance Premium Tax?
For the vast majority of people and businesses, the answer is no. Unlike VAT, you cannot reclaim IPT from HMRC. However, for businesses, the IPT included in your premium is a tax-deductible expense. This means it can be used to reduce your overall taxable profit.
What Is Insurance Premium Tax Used For?
Like most taxes, the money goes into the general pot for public spending. It helps support services such as the National Health Service (NHS), schools, and roads etc. The money is not ring-fenced for the use of the insurance industry. Therefore, the tax you pay for your car insurance could ultimately be used to repair a road or contribute towards a teachers’ salary.
The Bottom Line
Insurance Premium Tax UK is a cost that most of us simply can’t avoid if we want to stay protected. Since it cannot be avoided or reclaimed, understanding how it works helps you make better decisions when choosing policies and managing costs.
How AccoTax Can Help
At AccoTax, we are here to keep your books perfectly organised. If you want help with your tax or VAT, we offer a range of packages designed to fit your unique needs.
Reach out, get an instant quote, and let us help you stay com““pliant!
Disclaimer: All the information provided in this article on “Insurance Premium Tax UK: Current Rates & Exemptions (2026)” including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.
