Every household in the UK now pays the equivalent of £179 of insurance premium tax every year thanks to the government’s recent hikes to the tax which is factored into insurance bills.
Research from think tank the Social Market Foundation (SMF) has found that the government now raises £4.8 billion every year from the tax, the equivalent of £179 per household. The think tank has found that £89 of this comes directly from households on insurance products such as car and home insurance with the rest paid indirectly through higher business costs that lead to higher consumer prices.
The SMF estimates that this figure will exceed £200 by 2018. IPT now raises more money than so-called “sin taxes” such as alcohol duties. The Office for Budget Responsibility projects that the tax will raise more money than the widely-disliked inheritance tax (IHT) over the next three years.
IPT was conceived in 1994 and has risen substantially since its initial rate of 2.5%. Since 2005 it has doubled from 6% to 12% currently. The tax is steadily gaining a reputation as a “stealth tax” with research showing that nearly half (48%) of consumers are completely unaware of its existence.
SMF director James Kirkup says: “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.
The report’s author, SMF chief economist Scott Corfe adds: “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 the distributional consequences.”
Poorest households hit hardest
IPT disproportionally affects poorer households as they pay a higher percentage of their income on insurance products. As a result, the Association of British Insurers (ABI) has called for the government to commit to no further increases in the tax.
Huw Evans, director general of the ABI comments: "This report lays bare how unfair IPT is for individuals and businesses who have acted responsibly and taken out insurance. The report exposes that this tax impacts hardest on the poorest as well as penalising the responsible who insure their homes, businesses and health.
“Having doubled this tax in two years, it is time for the government to stop raiding the responsible and commit to no further increases in this parliament.