The chancellor, George Osborne, announced this year’s budget yesterday. Grabbing the most attention was the sugar tax which will be imposed on soft drink manufacturers in an aid to decrease child obesity.
However what stood out to us was the rise in insurance premium tax by 0.5%. This means that IPT now sits at 10%. It is also worth noting that IPT had already been raised the year prior, from 6% to 9.5%
“This will undoubtedly fuel further speculation about the rate heading towards 20% to be aligned with the VAT rate as is already the case in some other countries such as Germany and the Netherlands.” Ben Flockton, insurance tax partner at PwC.
For the time being though the insurance industry has been able to breathe a sigh of relief that the increase was not as much as many had expected. However it is important to note that when IPT was first introduced in 1994 the rate was just 2.5%. It took 17 years for the IPT rate to double when it was increased to 5% in 2011. Now that the IPT rate has doubled again to 10%, in a period of just 5 years; it is a strong indicator that we can expect another rise in the future.
Oppostion leader Jeremy Corbyn has already highlighted that this year’s budget is a detriment to the poor because of the tax breaks to the middle and upper class as well as a cut to corporation tax, but the rise of IPT is also unfair. The poorest in society often have the highest insurance premiums for car, van, bike or home insurance. The higher the IPT rate the harder it becomes for the poorest to pay their premiums, or even take out motor / home insurance at all.
However, Osborne has said that the income generated from the 0.5% increase will be used solely to fund flood defence spending. Although it is just an increase of half a percent it is expected to raise at least £700 million for flood defence. This decision was widely praised, particularly after winter floods that devastated Cumbria and other parts of the country. Together, with the introduction of Flood Re coming this April, the UK should be in a much stronger position than ever to protect homes from rising water levels.
However others argue that the decision to increase flood defence spending has come too late and that income from the IPT increase from 6% to 9.5% should have been used to improve flood defences earlier.
Although the tax on sugary drinks captured the focus of Osborne’s budget, the levy is only expected to raise £520 million, £200 million less than the projected income from the increase of insurance premium tax.
The chancellor believes that he will be able to balance the budget by 2020, a target that may be too difficult to reach, particularly as it was announced that a further £50 billion will be borrowed. If Osborne aims to have a balanced budget in the future expect huge spending cuts or another increase in taxes. With current trends it is more than likely to be insurance premium tax.