5 things you need to know about insurance premium tax

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Insurance premium tax on some policies rises to 12% on June 1st 2017. What is insurance premium tax and which policies is it charged on? Here are 5 things you need to know about insurance premium tax.

1. Insurance premium tax is not charged on all policies.

Insurance premium tax is a tax you pay on certain insurance policies every time you take them out or renew them. Insurance premium tax is charged on many policies, but not all. Those that don’t incur an insurance premium tax charge include:

  • Life insurance
  • Mortgage insurance
  • Insurance for spacecraft
  • Insurance for commercial ships and aircraft
  • Insurance for international railway rolling stock
  • Lifeboats and lifeboat equipment insurance
  • Goods in international transit insurance

2. Insurance premium tax is charged at different rates

Insurance premium tax has a higher rate of 20%, which applies to travel insurance and a lower rate of 12% from June 1st 2017. The following policies will have insurance premium tax at 12%:

  • Car insurance
  • Household insurance
  • Pet insurance
  • Private medical insurance

This means that the average home insurance policy costing £300 will go up by £6, the average car insurance policy costing £780 will go up by £15 and the average pet insurance policy costing £360 will go up by £7.

SAVVY TIP: The rate that you pay insurance premium tax at depends on the renewal date of your policy. If you take your insurance out on or after June 1st 2017, for example, you’ll pay the increased (12%) rate of insurance premium tax. But if you took your insurance out before then, you wouldn’t pay insurance premium tax at increased rate of 12%, even if you’re paying for it monthly.

Some insurance policies won’t increase their insurance premium tax rates. These are insurance policies that already incur an insurance premium tax charge of 20%. They include:

  • Travel insurance
  • Extended warranties

3. Insurance premium tax was introduced in 1994

Before 1994, insurance premium tax wasn’t charged on insurance policies. It was introduced at a low rate of 2.5%, but has increased over the years.

  • From 1 October 1994, a single rate of 2.5% was charged
  • 1 April 1997: increased to 4%
  • 1 July 1999: increased to 5%
  • 4 January 2011: increased to 6%
  • 1 November 2015: increased to 9.5%
  • 1 October 2016: increased to 10%
  • 1 June 2017: increased to 12%

4. You can save on insurance premium tax by not staying loyal

Unfortunately, insurance companies don’t seem to grasp the concept of loyalty, and they normally increase the premiums once you’ve been with them for more than a year. So, when your insurance is up for renewal, shop around by comparing policies on at least two price comparison sites (some have more insurers on their site than others), or check with a broker.

Figures from Consumer Intelligence show you can save £60 on the average car insurance policy by shopping around and £37 on a home insurance policy. And that’s if you’ve just been with your insurer for one year. If you’ve been with them for longer, the potential savings double.

SAVVY TIP: Don’t go for the cheapest policy; make sure you’re getting the cover you need. If you’re happy with your insurer, you should go back to them and ask them to match the price you’ve found elsewhere. It doesn’t always work but it’s worth a try.

5. The increase in insurance premium tax will raise £8 billion for the government

The government’s own figures show that between now and 2021, it will get an extra £8.1 billion just from the rise in insurance premium tax alone. An ‘average’ family will pay an extra £47 a year in insurance premium tax.

Related articles:

Using price comparison sites to buy home insurance

VIDEO: Getting the best travel insurance

VIDEO: What is life insurance?

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