3.2 Insurance Premium Tax

Most UK general insurance premiums carry Insurance Premium Tax (IPT). This section sets out what IPT is, the two main rates, the main exemptions, and the arithmetic for extracting the tax from a tax-inclusive premium.

What Is Insurance Premium Tax?

Insurance Premium Tax (IPT) is a UK tax on premiums charged for general insurance. It has four features that IF1 candidates must know:

• Charged by insurers — the insurer is the taxpayer and accounts for IPT to HMRC; the insured pays it as part of the premium.
• Included in the premium — IPT is bundled into the price the insured pays; it does not usually appear as a separate line on a consumer's policy documents (unlike VAT on a supermarket receipt).
• Not reclaimable — unlike VAT, a business buying insurance cannot register for IPT and reclaim the tax it has paid. IPT is a cost of buying insurance, not an input tax.
• Not VAT — insurance is exempt from VAT. IPT is a separate, parallel tax on the premium itself.

IPT applies to the premium, not to the claim payment, and it is due whenever a UK taxable insurance contract is made or renewed.

The Two Main Rates

IPT has two rates. Both have been unchanged since 1 June 2017 and remain current in 2026.

Standard rate 12%

The standard rate of 12% applies to most everyday general insurance. Typical examples:

• Motor insurance (private and commercial)
• Home (buildings and contents)
• Pet insurance
• Commercial property insurance
• Employers' liability and public liability
• Professional indemnity

If a question does not point to travel, supplier-arranged warranties or an exempt class, the standard rate is the safe answer.

Higher rate 20%

The higher rate of 20% applies to:

• Travel insurance — all travel insurance, whether single-trip or annual.
• Extended warranties on appliances and electrical goods sold at the point of sale — the cover a retailer sells alongside a TV, washing machine or laptop is taxed at 20%. (The same appliance covered under a standalone insurance policy, not tied to the sale, would generally be at 12%.)
• Certain vehicle hire and supplier-arranged insurance — insurance arranged by the supplier on vehicles, electronic goods and household appliances, including hired vehicles and gas central heating, but not mobile phones.

The "supplier-arranged" test is the key: cover the supplier bundles with the sale attracts 20%; cover the insured arranges independently generally attracts 12%.

Exempt classes (0%)

Certain classes are outside the scope of IPT altogether:

• Life insurance
• Permanent health insurance / income protection
• Reinsurance (IPT is not charged on the ceded premium — the original insurer has already accounted for IPT on the gross premium)
• Commercial ships and aircraft
• Export credit insurance
• Goods in international transit
• Spacecraft

These are not "zero-rated" (which would allow input tax recovery); they are exempt, meaning the insurer simply does not charge IPT on them.

Extracting IPT From a Tax-Inclusive Premium

IPT is included in the premium the insured pays, so the insurer must be able to extract the tax element for its HMRC return. Because the tax is a percentage of the net premium, the arithmetic is not simply "12% of the gross".

Worked example — standard rate

An insurer charges a tax-inclusive premium of £280 on a motor policy. Motor is standard-rate (12%).

• IPT = £280 × 3/28 = £30
• Net premium (what the insurer keeps for risk and expenses) = £280 − £30 = £250

Check: £250 × 1.12 = £280. Correct.

Worked example — higher rate

A travel insurance premium is quoted at £300 tax-inclusive. Travel is higher-rate (20%).

• IPT = £300 × 1/6 = £50
• Net premium = £300 − £50 = £250

Check: £250 × 1.20 = £300. Correct.

Quick Answer: To find the IPT inside a tax-inclusive premium, multiply by 3/28 at the standard rate (12%) or by 1/6 at the higher rate (20%).

Common Exam Traps

• "IPT is shown separately and reclaimable like VAT." It is not. It is bundled into the premium and is not reclaimable.
• "Travel insurance is standard rate." It is higher rate (20%).
• "Life insurance is zero-rated at 12%." It is exempt — no IPT at all.
• "IPT = 12% of the gross premium." The tax is 12% of the net premium. To extract from the gross, use the tax fraction 3/28.

Key Takeaways

• IPT is a UK tax on general insurance premiums, charged by insurers, included in the premium, and not reclaimable.
• Standard rate 12% covers most general insurance (motor, home, pet, property, liability, professional indemnity).
• Higher rate 20% covers travel insurance and supplier-arranged warranties on vehicles, electrical goods and appliances.
• Exempt classes include life insurance, income protection, reinsurance, ships and aircraft, and goods in international transit.
• To extract IPT from a tax-inclusive premium use 3/28 at 12% or 1/6 at 20%.