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What is Insurance Premium Tax?

Saturday 2nd February 2013 12:16:29

Insurance Premium tax is a taxation applied to all insurance policies


Insurance premium tax is a taxation applied to all insurance policies. You may not know it but each and every policy you buy from life insurance to house insurance and shortfall gap insurance a proportion of it will be tax.

Although the is no clear link to the rates of VAT ( value added tax ) insurance premium tax is normally the same rate.

In fact there are two rates of insurance premium tax and where you buy your policy from dictates how much you are charged. For example if you buy gap insurance directly from the organisation that are supplying your vehicle or if they can altered the amount that you are paying for your vehicle they are legally bound to charge you 20%. If you buy independently this is just 6%. So, are the rates of Insurance premium tax unfairly set away from main dealerships? Well we naturally do not think so, but please let us explain why. Many many years ago the rates of insurance premium tax where much lower and exactly the same no matter where you bought your policy from. This however led some unethical and immoral accounting practises.


This means that some unscrupulous dealerships would carry out some creative accounting in an attempt to lower the amount of tax that they had to pay and therefore increase their profit margins. For example if they sold a car for £10,000 and £395.00 for a gap insurance policy they would pay the current rate of vat on the profit from the sale of the car and a much lower rate on the gap insurance policy in the form of insurance premium tax. By simply changing the amount that you paid for your car and increasing the amount that you paid for your gap insurance they paid less tax.


For example same car same overall balance to you but now the car is just £8500 and your gap insurance policy is now £1895. The government is never one to shy away from tax avoidance and they had to come up with a system that was both fair to them, the garage and yet did not deter members of the public from protecting themselves. Hence the two tier insurance premium  tax system was born.

This means that consumers could still protect themselves and that there was no financial incentive for garages and business' to become creative with VAT and insurance premium tax.

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