VAT on Insurance UK: Is There VAT on Insurance Premiums and Motor Insurance

Is There VAT on Insurance in the UK

Insurance premiums in the UK are exempt from Value Added Tax (VAT). Under the VAT Act 1994, insurance services are a VAT-exempt supply, meaning insurers do not charge VAT on premiums and cannot reclaim VAT on related costs. This exemption applies to all insurance contracts issued in the UK, including motor, home, pet, travel, life and health insurance.

However, most insurance premiums are subject to a separate tax called Insurance Premium Tax (IPT), which was introduced by the Finance Act 1994. IPT is not VAT and works differently: it is charged at the point of premium collection by the insurer, who accounts for it to HMRC. The tax is typically included in the price quoted to the customer rather than added on top.

What Is Insurance Premium Tax (IPT)

Insurance Premium Tax is a tax on general insurance premiums received by insurers. It was introduced in 1994 at an initial rate of 2.5% and has risen substantially since then. The current standard rate of 12% has been in place since June 2017, when it was increased from 10%. The higher rate of 20% applies to specific categories of insurance.

IPT is administered by HMRC under the Finance Act 1994 and the Insurance Premium Tax Regulations 1994. The HMRC Insurance Premium Tax Manual (IPT1000 series) sets out detailed guidance for insurers on registration, accounting and payment. IPT is a liability of the insurer, not the policyholder, but in practice the cost is passed through to customers in the premium.

Standard IPT Rate: 12%

The standard IPT rate of 12% applies to the majority of general insurance premiums, including motor insurance (car, van, motorcycle), home insurance (buildings and contents), pet insurance, commercial property insurance, liability insurance, and most other non-life insurance products. For a car insurance premium of £800, the IPT element at 12% is approximately £85, embedded in the total price.

Higher IPT Rate: 20%

The higher IPT rate of 20% applies to three specific categories:

Travel insurance: All travel insurance contracts, whether sold as standalone policies or as part of a packaged bank account or credit card, are subject to the 20% higher rate. This applies regardless of the destination or duration covered.

Mechanical and electrical appliance insurance: Extended warranty and appliance protection insurance sold for domestic appliances, electronics and similar products is taxed at 20%.

Some vehicle insurance sold with vehicles: Certain insurance products sold directly alongside a vehicle purchase, such as guaranteed asset protection (GAP) insurance sold by motor dealers, are subject to the higher rate when sold as part of the vehicle transaction.

Insurance Exempt From IPT

Several categories of insurance are entirely exempt from IPT. These include life insurance and life assurance contracts, income protection insurance (also known as permanent health insurance), critical illness insurance, private medical insurance (PMI), reinsurance contracts, and insurance on commercial ships and aircraft used in international transport. Export credit insurance and most long-term insurance contracts are also exempt.

The distinction between long-term and general insurance is significant for IPT purposes. Long-term insurance (primarily life, health and income protection products) falls outside the IPT regime. General insurance (short-term contracts renewed annually, including motor and home insurance) is within the regime and subject to either the standard or higher rate.

Is There VAT on Motor Insurance

No. Motor insurance premiums are exempt from VAT. They are subject to the standard IPT rate of 12%. The same applies to van insurance, motorcycle insurance and other vehicle insurance products. The IPT is included in the premium and not shown as a separate line item on most renewal or new business documents, though some insurers do itemise it.

Can Businesses Reclaim IPT

No. Unlike VAT, IPT cannot be reclaimed by VAT-registered businesses. IPT is a cost that falls entirely on the insured, whether a consumer or a business. A company paying £10,000 in annual commercial insurance premiums cannot offset the embedded IPT against its VAT liability. This is a common source of confusion because VAT-registered businesses are accustomed to recovering input tax on most business expenditure.

Frequently Asked Questions

Is there VAT on insurance premiums in the UK?

No. Insurance premiums are exempt from VAT under the VAT Act 1994. However, most general insurance premiums are subject to Insurance Premium Tax (IPT) at either 12% (standard rate) or 20% (higher rate for travel and appliance insurance). IPT is included in the quoted premium.

Is there VAT on car insurance?

No. Car insurance premiums are VAT-exempt. They are subject to the standard IPT rate of 12%, which is included in the premium charged. The same applies to van, motorcycle and other vehicle insurance.

What is the IPT rate on insurance in 2026?

The standard IPT rate is 12%, applying to motor, home, pet and most commercial insurance. The higher rate is 20%, applying to travel insurance and mechanical or electrical appliance insurance. These rates have been unchanged since June 2017.

Can a business claim back IPT on insurance?

No. Insurance Premium Tax cannot be reclaimed as input tax by VAT-registered businesses. IPT is a non-recoverable cost for all policyholders, including VAT-registered companies. This differs from VAT, which businesses can generally recover on business expenditure.

Is health insurance subject to VAT or IPT?

Private medical insurance (PMI) is exempt from both VAT and IPT. Life insurance, income protection and critical illness insurance are also exempt from IPT. These long-term insurance products fall outside the IPT regime entirely.