How Insurance Premium Tax affects charities

Ahead of the release of The Budget on Wednesday 22nd, we have a look at what a further increase in Insurance Premium Tax could mean for charities.

What is Insurance Premium Tax?

Insurance Premium Tax was introduced by HM Revenues and Customs in 1994 and basically equates to insurance VAT that is applied to general insurance premiums. It is a legal requirement that insurers must follow and comes in two rates, standard and higher. Standard rate applies to most insurance policies whilst the higher rate applies to travel and some vehicle insurance. There are some exemptions, but charities as a category are not among them.

So why the concern?

Insurance Premium Tax has been gathering interest for the last couple of years because of the rapid increases made per year to the standard IPT rate. Since 2015, it has jumped from 9.5% to 12.5% and with the current uncertain economic climate, it is expected to rise again.

Another rise could have a devastating impact for some charities, as a survey carried out by the largest public-sector insurer, Zurich, has revealed that 47% of the public sector and voluntary bodies would be unable to “adequately insure” themselves against all necessary risks if a further increase occurred.

The impact on charities

The increases to IPT has already cost charities collectively an extra £25 million a year. The Chancellor of the Exchequer, Phillip Hammond, has shown interest in increasing IPT to match VAT’s 20%, which would mean a massive increase of 7.5% - costing charities overall an extra £20 million. Small charities would be the most severely affected, as they would be forced to pay a greater proportion of their income on insurance – often a legal requirement.

However, specialist insurer Ecclesiastical has teamed up with the Charity Finance Group to ask the government to grant charities an exemption, on the basis that they do not operate like normal businesses. CFG director, Andrew O’Brien, stated that further increases to IPT would mean that charities would have less budget “for charities to spend on their charitable activities.”

Charities have been acknowledged by the Government in the past to be separate from businesses, and have reductions and exemptions from other taxes such as VAT and Gift Aid, so it is unusual that they do not have the same privileges when it comes to IPT.