HM Revenue and Customs has doubled its tax take on a levy that many have no idea they pay, analysis has found.
The cost of Insurance Premium Tax (IPT) has surpassed £7bn for the first time this year, according to UHY Hacker Young.
The accountancy firm’s calculations suggest the cost has increased by 124pc in the space of just ten years, from £3.1bn in 2012.
Policy holders pay the tax, which has increased from 2.5pc to up to 20pc over the last 30 years, on products such as travel and car insurance.
Laura Suter, of investment platform AJ Bell, said: “Most people won’t be aware of Insurance Premium Tax, but this little-known tax now generates more than double the money than Inheritance Tax and is paid by almost every household in the UK .”
Insurance Premium Tax (IPT) is paid on nearly all insurance policies, with only a few exceptions – such as whole-of-life insurance and mortgage insurance. Many people are unaware of it because it is tied up in the premium they pay to the policyholder.
Richard Lloyd-Warne, of UHY Hacker Young, attributed the huge rise in IPT income to the growth in insurance policies.
He said: “The number of insurance policies people take out has risen sharply in recent years – pet and mobile phone insurance are just a couple of examples. All of those new policies mean even more income for the taxman.”
There have also been successive increases to IPT rates since it was first introduced, which has also boosted its cost.
When IPT was introduced in 1994 as a way for the government to tax the insurance industry – since insurance premiums are not subject to VAT – the standard rate was just 2.5pc. This year IPT raised just £117m for the taxman.
But successive increases mean it now stands at 12pc. For travel insurance, mechanical or electrical appliances insurance and some vehicle insurance, the higher rate of 20pc kicks in.
At the higher rate, for someone paying a car insurance premium of £700 (minus service fees), then £140 of those costs would go towards IPT.
Rising inflation and an increase in insurance costs have also driven up the tax income, according to Ms Suter, who said “with a dramatic increase in inflation this year, these figures will shoot up again for the current tax year”.
Mr Lloyd-Warne said the tax was “an invisible cost-of-living burden”. He said: “Households are being hit with a double whammy of paying for insurance, as well as the tax on top of it – all at a time when budgets are already being stretched to the limit.”
Ms Suter said: “Unfortunately there is no way around this tax, it’s automatically added to insurance contracts – the only way to reduce it is to reduce your insurance costs. Ways to do this include paying the cost upfront, rather than monthly, or increasing your voluntary excess, although this could cost you more if you claim.”