It came as no surprise to the insurance industry that the Chancellor George Osborne had Insurance Premium Tax (IPT) in his sights, announcing a further hike in his Budget speech.
Have increased from 6% to 9.5% last November, a further increase of 0.5 percentage points will come into effect from 1 October this year. The Chancellor said the move was in response to increasing extreme weather events faced by the UK and he stated that “substantial increases” in flood defence spending would result from the extra money raised by this latest tax hike – something in the region of £700 million.
Many in the industry may well have breathed a sigh of relief that he didn’t impose a bigger increase as had been touted in the days leading up to the Budget. However this 0.5 percentage point increase means that, year on year, insurance buyers face a whopping 66.6% increase in tax since March 2015 according to the British Insurance Brokers Association (BIBA).
There is an understandable fear that the Chancellor will continue to impose gradual IPT raises over coming Budgets to bring this tax up to 20% to be aligned with the VAT rate as is already the case in some other European countries such as Germany and Netherlands.
Any increase in the amount a consumer has to pay for insurance can have a major impact on their decision to take out a policy, or how much to cover. PWC estimates that the two-thirds rise equates to an additional IPT cost of around £13 on buildings and contents policies. BIBA’s CEO goes further stating that IPT is a tax collected and remitted by insurers, a tax on premiums paid by consumers.
The government, however, doesn’t see it that way. The president of the AA reports that Treasury minister Harriett Baldwin MP told them in a letter, ‘IPT is not a tax on consumers but on insurance companies’, which he likened to saying fuel duty is not a tax on drivers but on petrol stations.
I find it astonishing that a government representative can openly present such a blinkered view.
While competitiveness in the market has meant that insurance premiums have remained relatively stable and in some circumstance reduced, I can’t see insurers taking this latest increase on the chin and will pass this cost on to consumers. If the Chancellor is planning to continue to use IPT as a revenue raiser, then he should be man enough to call it what it is – a tax on consumers and not on business.
The Association of British Insurers (ABI) has warned the government against a further increase in IPT calling any such move as a ‘raid on the responsible’. I’m afraid that their emotional rhetoric will be for naught. According to the ABI, the summer Budget increase that came into effect last November would see a rise of £8 billion over five years. As the Chancellor desperately wants to balance his books by the end of this Parliament, it’s unlikely that he’ll ignore the money he can gather from such a huge revenue raiser.
Phil Lewis is head of compliance at Source Insurance