Are insurance premiums subject to VAT? Do you have to pay VAT on your insurance?
Short answer: You almost never have to pay VAT on insurance. But sometimes you do. Sort of.
In this post we’ll explain the law concerning VAT and insurance, and explain when you do and do not have to pay VAT on your insurance.
Do You Pay VAT on Insurance?
The Government guidance to VAT on different goods and services confirms that most types of insurance service are exempt from VAT. Exempt insurance services include insurance and reinsurance transactions, insurance brokers and agents acting in an intermediary capacity, and insurance supplies as a separate element but with other goods or services.
If you’d like to read the specific laws governing VAT and insurance, read VAT Notice 701/36.
When Do You Pay VAT on Insurance?
There are times when you might have to pay VAT on insurance. In some cases, insurance is supplied as part of a single supply with other goods and services. This type of insurance is only exempt from VAT if insurance is the principle element of the supply.
The Government guidance states that “if you supply exempt insurance with goods or services that are liable to tax, you’ll need to determine the correct tax treatment for your supplies.” What follows is a detailed guide for insurers demonstrating how to do just this.
So long-story short: You’ll only have to pay VAT on insurance in very specific circumstances. This is usually in cases where customers can choose to have goods or services with or without insurance. For example, a moving company might have a block policy to cover all moves, but they may charge their customers a separate fee for cover. That fee would be taxable.
The rules are a little complicated, and it’s worth reading the guidance in full. It should reassure you, though, that in the vast majority of cases, VAT is exempt from insurance.
But that’s not to say that insurance is exempt from tax…
What is Insurance Premium Tax?
Insurance Premium Tax (IPT) is not VAT, but you might think of it as “VAT for insurance”. It’s a tax that’s applied to insurance premiums received under taxable insurance contracts. It’s applied at two rates: A standard rate of 12%, and a higher rate of 20% for insurance supplied with selected goods and services.
So what sort of insurance contracts are taxable?
All of them, unless they’re specifically exempted. Exempt contracts include re-insurance, long-term insurance (such as life insurance and permanent health insurance), commercial goods in international transit, and insurance for any risks located outside the UK.
The higher rate of IPT is applied to insurance sales in two select trading sectors where insurance is sold in relation to goods and services that are subject to VAT. This might explain why there’s so much confusion about IPT and VAT. The two are often closely linked!
The two trading sectors subject to the higher rate of IPT are the sales of cars, light vans and motorbikes, and the sale of electrical or mechanical domestic appliances. Even in this case, the higher rate only applies when the goods are sold, hired or leased through the same person who supplies the goods. If the transaction is managed by an intermediary or an insurer, the higher rate may not apply. All travel insurance is also subjected to the higher rate.
Again, it’s worth reading the full Government guidance to IPT. Find it here.
Worried About VAT and IPT on Insurance?
Don’t be. This is a tax on insurers, and not something those who purchase insurance policies necessarily have to think about. Most insurers add IPT to their customers’ premiums. And because it’s applied at a flat rate across all policies, those who pay the highest premiums are most affected by IPT.
At Tapoly, we specialise in bespoke insurance cover for freelancers and contractors, and our policies start from just 35p a day. There’s no hidden fees, so you don’t have to worry about unexpected IPT payments.
You can get an online quote in the space of a minute. Head here to learn more.