Chancellor Under Pressure to Cut £7 Billion Insurance Stealth Tax Amid Cost-of-Living Crisis

In the wake of surging insurance costs and burdensome living expenses, Chancellor Jeremy Hunt is being urged to make a significant move: slashing the hefty insurance premium tax (IPT) that has quietly drained £7.3 billion from policyholders’ pockets.

Skyrocketing Stealth Tax on Insurance

The Mail reports that the Association of British Insurers (ABI), a key player in the industry, has publicly appealed for this tax reduction in the upcoming Autumn Statement, highlighting the financial strain that the “stealth tax” places on both individuals and businesses. This comes at a time when insurance costs are spiraling, and the revenue from IPT has reached an all-time high.

For the uninitiated, IPT is a tax on insurance policies, including essential ones like household, motor, private medical, and even pet insurance, charged at a standard rate of 12%. However, certain types of insurance, such as travel insurance, face an even steeper rate of 20%.

Record-Breaking Tax Revenue Amid Financial Hardship

The government’s IPT revenue has been on a sharp incline. The previous financial year alone saw a record collection of £7.3 billion, up from £6.6 billion the year before. Current trends suggest another record-breaking year is underway, with IPT receipts in just the first four months already nearing a staggering £2.8 billion—a 27% hike compared to the same period last year.

The ABI is challenging this upward trajectory, stating, “Insurance Premium Tax penalises people for being responsible. With the ongoing cost-of-living crisis, the Government needs to alleviate some of this pressure by considering a tax cut.”

Public Outcry Over Tax and Premium Hikes

This isn’t the first outcry over IPT. The MoS has consistently spotlighted the drastic tax increases, sharing stories of individuals who’ve seen their motor renewal premiums skyrocket from £371 to an eye-watering £2,215.

The contention doesn’t stop there. Critics argue that the government might be turning a blind eye to these soaring insurance costs because of the financial windfall—£7.3 billion, a sum greater than what the government would forgo if it cut the basic rate of income tax by one per cent.

Initially introduced in 1994 at a modest 2.5%, the IPT has undergone several hikes, significantly inflating insurance premiums over the years.

Divided Opinions on the Proposed Cut

Despite the ABI’s push, opinions on the tax cut are split. While there’s an acknowledgment that increased IPT revenue partly comes from a boost in private medical insurance sales, due to the NHS being under pressure, many believe that insurance companies’ price hikes are the main culprit.

Recent data from comparison website supports this, showing an average 58% increase in car insurance over the past year alone, bringing a typical policy to £924.

Dennis Reed of Silver Voices, an advocacy group for the elderly, argues that a tax reduction shouldn’t be the first concern. He criticizes insurance companies for significant premium increases, particularly for older adults, even when they have a clean no-claims record. Reed emphasizes, “Prices should be risk-related, not hiked up for reasons like reaching a certain age. Insurers need to work on lowering prices, which would naturally bring down IPT revenue.”

Government’s Stance

Responding to the controversy, the Treasury defended the IPT, stating, “Revenue from Insurance Premium Tax contributes towards vital public services, such as the NHS, social care, and defence.” They underscored the tax’s role in supporting essential societal needs, even amidst the clamor for relief from the financial pressures of IPT on everyday people and businesses.