Insurance Premium Tax

Insurance premium tax is a tax on general insurance premiums, charged at a standard rate of 12% and a higher rate of 20%. Both rates have been in force since 1 June 2017 and neither was changed by Finance Act 2026. The single most important point on this page is that insurance premium tax is not VAT. Insurance is a VAT-exempt supply, so no VAT is charged on a premium and there is no input tax to recover. IPT is charged instead, and it is a cost to the business rather than a tax it can reclaim.

That distinction is where the money is lost. A 20% figure on an insurance document looks exactly like VAT to a bookkeeper working at speed, and it is entered in the input tax box as though it were recoverable. It is not, and it never was, because an exempt supply cannot generate input tax. This guide sets out the rule and its statutory source, draws the boundary between the 12% and 20% rates with real policies on each side, answers the car insurance premium tax and health insurance premium tax questions properly, works through figures for a real trade, lists what is exempt from IPT altogether, and closes with the errors that actually cost money.

What insurance premium tax is, and the rule

IPT is charged under Finance Act 1994 Part III. It is a tax on the premium received by an insurer under a taxable insurance contract, which in broad terms means a general insurance contract covering a risk located in the United Kingdom. It is not a tax on the insurer's profit, it is not a regulatory levy, and it is not a charge the policyholder registers for or files a return for.

The rate rule itself is short. Section 51 (Rate of tax) provides that tax shall be charged:

"(a) at the higher rate, in the case of a premium which is liable to tax at that rate; and (b) at the standard rate, in any other case."

Read that carefully, because the structure matters more than it first appears. The standard rate is the default. A premium is charged at 12% unless something positively pushes it into the higher-rate category. Nothing about the subject matter of the policy, the size of the premium, the type of customer or the value of the asset drags a premium up to 20%. Only membership of a defined higher-rate class does that.

Section 51A is the gateway to the higher rate. It provides that a premium received under a taxable insurance contract by an insurer is liable to tax at the higher rate if it falls within one or more of the paragraphs of Part II of Schedule 6A. In HMRC's published summary of those classes on the insurance premium tax rates page, the higher rate covers three things:

• Travel insurance.
• Insurance on mechanical or electrical appliances, meaning electronic goods and household appliances, where the cover is sold by the supplier of the goods.
• Certain vehicle insurance arranged by the vehicle supplier rather than by an insurance company, including cover on hired vehicles.

Two of those three are defined by who sold the policy, not by what the policy covers. That is the fact almost every reader gets wrong, and it is the reason the boundary table below is arranged the way it is.

How the tax appears on a premium schedule

Presentation varies between insurers and brokers, and that is part of why the tax is so often misread. Some schedules show a net premium and an IPT line beneath it. Some show a single gross figure with a note that the amount includes insurance premium tax. Some show a percentage without naming the tax at all. None of those presentations changes the treatment, and the absence of an IPT line does not mean no IPT was charged; it usually means the insurer has quoted the tax-inclusive figure. If you need the split, for example to check that a travel policy really has been taxed at the higher rate, ask for it in writing rather than inferring it from the total.

Who accounts for the tax

The insurer accounts for IPT to HMRC, not the policyholder. As a business buying cover you never register for IPT, never file an IPT return and never calculate the liability yourself. You simply pay the premium with the tax included and record the whole figure as the cost of the policy. If you need the detail of the insurer's registration and filing duties, take it from HMRC's live insurance premium tax guidance on GOV.UK rather than from a summary, because those administrative rules sit outside the scope of this page.

The two rates: 12% standard and 20% higher

The standard rate of IPT is 12%. The higher rate is 20%. Both took effect on 1 June 2017 and neither has changed since. There is no reduced rate, no zero rate and no threshold below which small premiums escape the tax. A £40 annual policy carries IPT on the same basis as a £40,000 one.

It is worth saying plainly that Finance Act 2026 did not change either rate. What Finance Act 2026 and the surrounding measures did move was scope, meaning which contracts are taxable at all, and those changes are set out further down this page with their dates. If you read anywhere that IPT rose in 2026, that source has confused a scope change with a rate change.

The coincidence that the IPT higher rate is 20% and the VAT standard rate is also 20% is precisely what causes the bookkeeping error this page exists to prevent. The two figures are numerically identical and legally unrelated.

The boundary: IPT at 12% against IPT at 20%

The table below puts real policies on each side of the line. Read the left column as the ordinary case and the right column as the exception.

IPT at 12% (standard rate)	IPT at 20% (higher rate)
A driving instructor's motor policy bought direct from an insurer or arranged through a broker	The same class of cover on a hire car, arranged by the vehicle supplier rather than by an insurance company
A hairdresser's shop contents and public liability policy	The extended warranty the salon's till supplier sells alongside the till, being insurance on a mechanical or electrical appliance sold by the supplier of the goods
A builder's van insurance arranged through his own broker	A travel policy sold to that same builder for a working trip abroad
A care home's employers' liability and buildings cover	The appliance cover a white-goods retailer sells alongside a washing machine supplied to that care home
A private medical policy a company buys for its staff, which is general insurance at 12%	Not applicable. Medical cover is not one of the higher-rate classes, so no route takes it to 20%

The deciding test in the right-hand column is who arranged the sale, not what is covered. The same van, the same washing machine and the same risk can sit in either column. What moves a premium across is that the person selling the insurance is the person supplying the vehicle or the appliance, rather than an insurer or a broker. Travel insurance is the one higher-rate class defined by subject matter instead of route of sale, which is why it sits in the right-hand column regardless of who sells it.

Car insurance premium tax

Car insurance premium tax is the query that brings most people here, and the honest answer is that ordinary motor insurance is standard-rated. A private or commercial motor policy bought from an insurer, or arranged through a broker or a comparison route that places business with an insurer, carries IPT at 12%. It does not matter whether the vehicle is a hatchback, a courier's van, a driving instructor's dual-control car or a fleet of them. It does not matter how large the premium is.

The 20% rate reaches motor insurance only through the third higher-rate class: vehicle insurance arranged by the vehicle supplier rather than by an insurance company, including hired vehicles. In practice that is the cover offered across a hire desk, or the policy a supplier of the vehicle arranges as part of supplying it. The insurance is incidental to the supply of the vehicle, and the higher rate follows that.

So the correct way to answer "what is the rate of car insurance premium tax" is with a question of your own: who sold you the policy? If the answer is an insurer or a broker, the rate is 12%. If the answer is the business that supplied or hired you the vehicle, expect 20%. The vehicle itself tells you nothing.

This also explains an experience many business owners have had and never understood. A courier renews the van policy in March at 12%, hires a replacement van in June while the van is off the road, and finds the hire company's insurance line taxed at 20%. Nothing has changed about the risk. What changed is who arranged the cover.

Health insurance premium tax

Private medical insurance is general insurance. A premium for a UK-located medical risk is a taxable insurance contract and carries IPT at the standard rate of 12%. There is no higher-rate class that catches medical cover, so 20% never applies to it, and there is no exemption for it either. A company paying for staff cover pays the 12% as part of the premium, and, because insurance is VAT exempt, there is no VAT on the document and nothing to recover.

What is genuinely outside IPT is long term business. Contracts constituting long term business, which is the category covering life assurance, pensions business and permanent health insurance, are exempt under Finance Act 1994 Schedule 7A. The boundary matters because the two products are often bought together and sit next to each other in the same file. A private medical policy carries 12% IPT. A life policy or a permanent health policy carries none.

Health insurance also raises an employment tax question that is not an IPT question at all. Where an employer pays for staff medical cover, the benefit position, the P11D treatment and the employer's Class 1A liability all run on their own rules. IPT does not change any of that, and the 12% is simply part of the cost the employer is reporting.

Insurance premium tax is not VAT, and this is the paragraph that matters

Insurance is an exempt supply under VATA 1994 Schedule 9 Group 2, items 1 and 4. An exempt supply carries no VAT. Because no VAT is charged on the premium, there is no input tax for the policyholder to recover, whatever its VAT status and whatever its partial exemption position. HMRC's insurance guidance in Notice 701/36 puts it as bluntly as a tax notice ever does: VAT and IPT are two very different taxes, and IPT is not recoverable in the way input VAT is.

The practical consequences follow directly:

• Nothing from an insurance premium goes in box 4 of a VAT return. Not the IPT, not any part of the premium.
• The premium does not belong in your input tax records as a VAT-bearing purchase. It is a cost with no VAT element at all.
• A 20% line on an insurance document is not VAT. It is the IPT higher rate, and treating it as VAT produces an overstated reclaim that is recoverable by HMRC with interest.
• Being VAT registered changes nothing. Registration gives you the right to recover VAT charged to you. It cannot create a recovery where no VAT was charged.

If you want the underlying distinction between exempt supplies and zero-rated supplies, and why the two sound similar but behave very differently for recovery, that belongs on our dedicated pages rather than here. See our guide to zero-rated VAT for the exempt against zero-rated definition, and our guide to VAT exemption for the exemption framework as a whole. Exempt turnover also behaves differently from taxable turnover when you are testing whether you must register, which is covered in our guide to the VAT threshold.

Worked examples

Figures below use only the two locked rates. Nothing here depends on the size of the business or the identity of the insurer.

A courier's van policy, standard rate

A self-employed courier renews the van policy through a broker. The net premium quoted is £1,200.

• IPT at 12% of £1,200 = £144
• Total payable = £1,344

No VAT appears anywhere on the document, because there is none to appear. The £144 is not input tax, is not recoverable, and does not go on a VAT return. The courier records £1,344 as the cost of insurance. The whole £1,344 is the figure that goes through the accounts, and the deductibility question is decided on ordinary principles, not by splitting out the tax.

The same courier, a travel policy, higher rate

Two months later the same courier buys a £180 travel policy for an overseas job.

• IPT at 20% of £180 = £36
• Total payable = £216

Same business, same month in the ledger, two different rates. The reason is the class of insurance, not the customer, not the business's VAT status and not the size of the premium. And the £36 is no more recoverable than the £144 was.

A hairdresser and the till warranty

A salon buys shop contents and public liability cover from a broker at a net premium of £640, and separately takes the extended warranty the till supplier offers on the new till, at £150.

• Contents and liability: IPT at 12% of £640 = £76.80, total £716.80
• Till warranty: IPT at 20% of £150 = £30, total £180

The warranty is insurance on a mechanical or electrical appliance sold by the supplier of the goods, so it falls in a higher-rate class. Had the salon insured the till under an ordinary contents policy arranged by its broker, the same asset would have carried 12%. Two documents, one asset, two rates, and the only variable is who sold the cover.

What is exempt from IPT altogether

Some contracts are not taxable at all. Finance Act 1994 Schedule 7A (Contracts that are not taxable) lists them. Summarised, they are:

• Reinsurance.
• Contracts constituting long term business, which covers life assurance, pensions business and permanent health insurance.
• Motor vehicles let on relevant benefit terms, the disability leasing route, subject to the restriction from 1 July 2026 described below.
• Commercial ships, and lifeboats and lifeboat equipment.
• Commercial aircraft and spacecraft.
• Risks located outside the United Kingdom.
• Foreign or international railway rolling stock, and Channel Tunnel cover.
• Goods in foreign or international transit.
• Credit, exchange losses and the provision of financial facilities.

The exemption that catches out ordinary businesses most often is the one for risks outside the United Kingdom. IPT follows where the risk is located, not where the policyholder is. A UK company insuring a building it owns abroad is not, on that count alone, in the IPT net for that risk. Equally, and this is the point behind the embassy change below, a risk physically located in the UK is in the net even where the policyholder is not a UK person.

Two scope changes in 2026, and neither is a rate change

Both changes below move which contracts are taxable. Neither touches the 12% or the 20%.

From 1 July 2026: the disability vehicle leasing exemption is narrowed

The Schedule 7A exemption for motor vehicles let on relevant benefit terms is being restricted. From 1 July 2026 it applies only to vehicles substantially and permanently adapted for, or originally designed for, wheelchair or stretcher users. Other vehicles leased through qualifying schemes become liable to IPT at the standard 12% rate. The restriction applies to leases entered into on or after 1 July 2026; pre-existing leases keep the exemption.

The detail and the government's own description of the measure are in the HMRC and HM Treasury policy paper, Motability Scheme: reforming tax reliefs. We deliberately do not cite a section number for this change, because the policy paper attributes it to the Finance Bill for 2025-26 and we have not verified the enacting section in the Act as passed. Where the exact statutory reference matters to a lease you are entering into, take it from the legislation itself or from the insurer.

From 1 August 2026: UK embassy buildings and contents become liable

From 1 August 2026, premiums on buildings and contents insurance for UK-based embassies become liable to IPT, the risk being located in the United Kingdom. This is a narrow measure with no effect on ordinary commercial or household property cover, and it is included here only so that a reader who has seen "IPT change 2026" in a headline can see what actually changed.

What people get wrong

These are the errors that cost real money, in rough order of how often they appear in a set of books.

1. Entering IPT in the VAT box as reclaimable input tax

The most expensive error on the page. IPT is not input tax. Insurance is exempt, so no VAT was charged and there is nothing to recover. A business that has been putting the IPT on its insurance into box 4 has been overstating its reclaim for as long as the practice has run, and HMRC will assess it with interest on discovery. The fix is mechanical: code insurance premiums to a no-VAT tax code in the bookkeeping software and keep them there.

2. Assuming that 20% on an insurance document is VAT

It never is. There is no route by which VAT at 20% appears on an insurance premium, because the supply is exempt. A 20% figure on an insurance schedule is the IPT higher rate, which tells you the policy is travel cover, appliance cover sold by the supplier of the goods, or vehicle cover arranged by the vehicle supplier. Treat the number as a clue to the class of the policy, not as recoverable tax.

3. Assuming ordinary motor insurance is higher-rated

Cars feel like they belong in the vehicle class, so people expect 20%. They are wrong. Ordinary motor insurance bought from an insurer or a broker is standard-rated at 12%. The higher rate only reaches vehicle cover where the vehicle supplier arranged the insurance.

4. Assuming a rate changed in 2026

Neither rate changed. Both have stood since 1 June 2017. Only scope moved, on 1 July and 1 August 2026, and both of those changes are narrow. If a budget summary left you expecting a higher premium because of an IPT rate rise, there was no rate rise.

5. Treating the IPT charge as a reason not to insure

IPT adds to the cost of cover and there is no way around it, but it is a cost line and the premium is still deductible against profit on ordinary principles. Cancelling necessary cover to avoid a 12% tax on it is a poor trade in every direction. Where the premium is deductible, the IPT goes with it. Whether a particular premium is deductible is a different question, and for the household case our guide to claiming home insurance against your taxes picks that up.

6. Splitting the IPT out in the accounts as though it were recoverable

Some bookkeepers separate the IPT into its own nominal code in the hope of reclaiming it later, or because the schedule shows it separately. There is no benefit in the split and it invites the box 4 error every time someone reviews the account. Record the gross premium as the cost of insurance.

7. Reading the higher rate as a penalty on risky trades

There is no risk-loading in IPT. A scaffolder's liability cover and an office's contents cover are both at 12%. The higher rate is not a judgement on the hazard, it is a rule about three defined classes of contract.

Devolution

IPT is a UK-wide tax under Finance Act 1994 and is not devolved. The rates and the exemptions in this guide apply in England, Scotland, Wales and Northern Ireland in the same terms. The VAT position on insurance, being exempt under VATA 1994 Schedule 9 Group 2, is also UK-wide.

The short version

Insurance premium tax is charged at 12% as the default and 20% only where a premium falls into one of the three higher-rate classes, and the deciding factor in two of those three is who sold the policy rather than what it covers. Car insurance premium tax is 12% when the cover comes from an insurer or a broker and 20% when the vehicle supplier arranged it. Health insurance premium tax is 12%, while life, pensions and permanent health cover carry none at all. And the point worth carrying away from the whole page: it is not VAT, there is no VAT on a premium to recover, and the tax on an insurance schedule is a cost of the policy rather than something to claim back.

Related guides

• Zero-rated VAT, for the difference between exempt and zero-rated supplies.
• VAT exemption, for the exemption framework and what it means for recovery.
• The VAT threshold, and why exempt turnover does not count toward it.
• Can I claim home insurance on my taxes, for whether a premium is deductible at all.