19 September 2016Insurance Premium Tax Increases On 1st October - What Does It Mean For You?
First, the Insurance Premium Tax (IPT) is an industry wide issue. It affects most insurers in the same manner: it rose from 6% to 9.5% in November 2015 and on 1st October 2016 it rises again, albeit slightly, to 10%.
While the UK still has amongst the lowest IPT rates in the EU the rate can reach up to 22% in some EU countries and we want to help make sure you continue to adapt to changes.
In this article, we take a look at how you can make sure your organisation can keep IPT costs predictable while helping protect your bottom line.
What’s included in your premium …
Let’s break down the cost elements within a typical business insurance premium. They cover:
- The actual risk insured.
- Costs of administration (that is, administrative costs which are charged to the policyholder).
- Commission (paid to or retained by brokers or intermediaries).
- Tax - typically premiums are tax-inclusive for IPT purposes in the SME sector. Larger risks usually identify IPT separately.
- Interest (where credit arrangements allow for payment in instalments, whether or not the payment for this facility is called interest).
However credit charges, whether or not the payment for this facility is called interest, are not treated as part of the premium where the charge is made under a separate contract - for example, a contract regulated by the Consumer Credit Act such as with a premium finance instalment provider.
The background …
It’s not unreasonable to assume that most insurers will ultimately pass on the additional extra cost - and all subsequent IPT increases in the future. The rise from 9.5% to 10% generally increases the cost of insurance proportionally as the premiums increase.
- Say your annual basket of IPT-qualifying premiums costs you£15,000. The extra IPT element is £1,425 at the 9.5% level. From 1st October, that extra IPT component at 10% will cost£1,500, up £75.
- On a £50,000 annual premium portfolio, IPT moving to 10%adds an extra £250 for a total of £5,000.
- From 1st February 2017, HMRC states that all premiums will operate with the new 10% rate, irrespective of when the policy began.
Some people believe that by extending their policy or attempting to cancel and rewrite prior to the 1/10/16 date means they may avoid the tax for another year. This is not the case. We can clarify this further should you need independent advice, but essentially the UK tax law has anti-tax avoidance measures in place and the higher IPT rate may nonetheless apply.
Planning for your next round of renewals
Give yourself time to explore impacts and options
- Don’t leave renewal planning to the last minute. Make sure you discuss things in-house or talk to us in good time so that you know the continuing financial impact of IPT.
Review your existing premiums and project possible premium increases
- Calculate the additional tax cost for all future policy renewals making a budget provision for any increase.
- Where your budgets do not allow for such increases, explore ways and means of reducing costs with your Arthur J. Gallagher advisor.
- Finally, always discuss the renewal strategy with us first.
Arthur J. Gallagher: our conclusions …
Insurers have historically passed on the small, incremental increases in IPT. But large jumps - from 6% to 9.5% in November 2015 and another small incremental movement upwards in October 2016 - make it tougher. That’s why planning ahead is so important. Your broker can help you build the worst-case financial scenario come renewal time - and that gives you the breathing space to explore potential alternatives.
Come and talk to us - we’re here to help.