The impact of an ‘unfair’ and ‘little-known’ tax on UK businesses & households

 

New research finds that the little-known insurance premium tax (IPT) now raises £4.8 billion a year – the equivalent, for each UK household of £179 a year and is expected to increase to £200 in 2018.

The research from the Social Market Foundation confirms that about half of the money collected by IPT is paid directly by households on insurance products, with the remainder paid by businesses. Business costs associated with IPT are likely, at least in part, to feed through into the finances of UK households – through higher consumer prices, lower dividends and reduced profits for business owners.

Forecasts suggest that revenue raised by IPT is set to increase and rise to the equivalent of over £200 a year for each UK household from 2018.

IPT now raises more revenue than many so-called ‘sin taxes’, such as beer and cider duties, and duties on wine and on spirits, finds the research, in a new SMF report called ‘The impact of Insurance Premium Tax on UK households‘, having risen faster than tax on tobacco since its inception in 1994. According to Office for Budget Responsibility projections, it is set to raise more revenue than inheritance tax over the next three years.

IPT has increased substantially since its inception in 1994, when its initial rate was set at 2.5%. In recent years, IPT has climbed rapidly – since 2005, the standard rate has doubled from 6% to the present rate of 12%.

Such large hikes in IPT 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 of changes in IPT. IPT is a regressive form of taxation; lower income households spend a greater proportion of their disposable income on insurance (excluding IPT-exempt life insurance) than the richest households.

Despite the scale of the increases in IPT observed, survey analysis undertaken as part of this research suggests a significant lack of awareness about the existence of the tax. The Opinium survey of 2,000 adults showed about half (48%) of individuals unaware of the existence of IPT – significantly higher than any of the other taxes and duties we asked them about.

The report’s author, SMF chief economist Scott Corfe said: “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 thedistributional consequences.” 

Responding to the publication of a report from the Social Market Foundation: The Impact of Insurance Premium Tax on UK households, Huw Evans, Director General of the Association of British Insurers (ABI), said:

“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.”

SMF director James Kirkup said: “This report sets out the facts about a significant but little-known tax, to help inform the public about the size and operation of that tax, relative to household finances, and relative to other taxes and the wider public finances. We don’t take a view on whether IPT is a fair or unfair tax, or about the level and application of that tax, relative to other fiscal choices. But we do think that voters and those who make decisions on their behalf should have a more honest conversation about these issues.

“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.

 

You can see the SMF press release in full here.

 
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