New research from the Social Market Foundation finds that the little-known insurance premium tax (IPT) now raises £4.8 billion a year - the equivalent of £179 a year for each UK household.
About half of this is paid directly by households on insurance products – the equivalent of £89 per household – with the remainder paid by businesses. Business costs associated with IPT are likely, at least in part, to feed through into the finances of UK households – through higher consumer prices, lower dividends and reduced profits for business owners. Forecasts suggest that revenue raised by IPT is set to increase and rise to the equivalent of over £200 a year for each UK household from 2018.
IPT now raises more revenue than many so-called ‘sin taxes’, such as beer and cider duties, and duties on wine and on spirits, finds the research, in a new report called ‘The impact of Insurance Premium Tax on UK households‘, having risen faster than tax on tobacco since its inception in 1994. According to Office for Budget Responsibility projections, it is set to raise more revenue than inheritance tax over the next three years.
IPT has increased substantially since its inception in 1994, when its initial rate was set at 2.5%. In recent years, IPT has climbed rapidly – since 2005, the standard rate has doubled from 6% to the present rate of 12%.
Such large hikes in IPT have taken place despite a lack of published evidence around its impact on consumer behaviour and household finances, especially with respect to the distributional consequences of changes in IPT. IPT is a regressive form of taxation; lower income households spend a greater proportion of their disposable income on insurance (excluding IPT-exempt life insurance) than the richest households.
Despite the scale of the increases in IPT observed, survey analysis undertaken as part of this research suggests a significant lack of awareness about the existence of the tax. The Opinium survey of 2,000 adults showed about half (48%) of individuals unaware of the existence of IPT – significantly higher than any of the other taxes and duties we asked them about.
The report’s author, SMF chief economist Scott Corfe said:
“Forecasts suggest that the per-household annual costs of IPT are set to increase. IPT now raises more revenue than many so-called ‘sin taxes’, having risen faster than tax on tobacco since 1994.
“In recent years, IPT has climbed rapidly as policymakers have sought additional revenue to reduce the deficit. These hikes have taken place despite a lack of published evidence around its impact on consumer behaviour and household finances, especially with respect to thedistributional consequences.”
SMF director James Kirkup said:
“This report sets out the facts about a significant but little-known tax, to help inform the public about the size and operation of that tax, relative to household finances, and relative to other taxes and the wider public finances. We don’t take a view on whether IPT is a fair or unfair tax, or about the level and application of that tax, relative to other fiscal choices. But we do think that voters and those who make decisions on their behalf should have a more honest conversation about these issues.
“New polling in our report suggests that about half of adults surveyed were unaware of IPT before being asked about it. IPT could be described a “stealth tax”, a term that captures public cynicism about the honesty and transparency of the tax system.
Notes to editors
This SMF analysis of IPT shows that:
- If the standard rate of IPT had remained at 5%, its rate prior to 2011, then the savings per UK household could be significant. For the current fiscal year, 2017/18, we estimate that households are directly paying about £50 per year more as a result of higher IPT. If the business costs associated with higher IPT are ultimately borne by households, then the per household cost could be as high as £105.
- To put this into context, costs of over £100 associated with higher IPT could, for a typical income taxpaying worker, offset the financial benefits of the April 2017 increase in personal allowances from £11,000 to £11,500.
The scope of the research is twofold: to explore the fiscal facts of IPT: how much it raises and who pays it; and to explore public understanding of the tax – do people know what it is and how it works? This report was commissioned by the ABI and carried out by SMF, which retains editorial independence.
To interview the report author SMF chief economist Scott Corfe or SMF director James Kirkup, please contact SMF communications manager Mercedes Broadbent on mercedes@smf.co.uk / 07425 609148.
About the SMF
The Social Market Foundation (SMF) is a non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this.
About the ABI
The ABI is the voice of the UK’s world leading insurance and long-term savings industry. A productive, inclusive and thriving sector, we are an industry that provides peace of mind to households and businesses across the UK and powers the growth of local and regional economies by enabling trade, risk taking, investment and innovation.
