How does Insurance Premium Tax (IPT) affect car insurance?

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The recent rise in Insurance Premium Tax (IPT) to 12% from June 2017 means that all car drivers will see an increase in their insurance premiums.

What is Insurance Premium Tax?

Insurance Premium Tax (IPT) is a tax on general insurance premiums, including car insurance, home insurance and pet insurance. Introduced by the government in 1994, there are two rates of IPT: a standard rate of 12% (as of 1 June 2017) and a higher rate of 20%, which applies to travel insurance, electrical appliance insurance and some car insurance.

IPT works in a similar way to VAT as it’s added as a percentage to the total cost of your insurance premium. So, if your car insurance was £500 before IPT, it would increase to £560 after the standard rate of 12% is added.

How has IPT increased over the years?

In 1994, the introductory standard rate of IPT was just 2.5%. But over the years IPT has increased, to 6% in 2015, then to 9.5% in November 2015, and in October 2016 it rose by 0.5% to 10%.  Today’s rate of 12% means that IPT has doubled in only a few years.

How does the recent rise in IPT affect the price of car insurance?

According to the Association of British Insurers (ABI), the latest rise in IPT means that the average car insurance premium will increase by £8. But it’s young drivers who will be hardest hit as they’re the ones that pay the highest premiums. Critics say that a 12% tax on top of their often sky-high policies is unfair, describing it as a ‘stealth tax’. Our latest young drivers report found that 17-24 year olds spent an average of £1,348.37** on their insurance premium; the ABI’s figures show that a typical 19-year-old driver will now be paying an extra £20 on top of that for their car insurance.

Concerns have also been raised that rising car insurance costs could lead to even more uninsured drivers on the road (there’s already an estimated one million uninsured cars on the UK’s roads).

Be wary of higher rate IPT on some car insurance

The higher rate of IPT (currently 20%) is sometimes charged on car insurance policies taken out directly with a car dealership, for example, when you buy a brand-new car. For that reason, always check before you take up an offer of insurance from a dealership (the higher rate won’t apply if you’re offered car insurance for free as part of a package). 

How can I cut the cost of car insurance?

While there’s nothing you can do about the rise in IPT, there are steps you can take that could help cut the cost of car insurance. Take a look at our top tips for cheap car insurance.

And when your car insurance is next up for renewal, make sure you use our price comparison service to shop around. We’ll help you compare more than 100 trusted insurance providers, so you’re sure to find a good deal that gives you the cover you need, at a price that suits you. So start comparing today.

**Taken from the September edition of the Young Drivers report – February 2018.

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