IPT part 1 - the little known, big cost: insurance premium tax (IPT) and insurance intermediaries

IPT is also unusual; under UK IPT legislation, the insurer submits IPT returns, commercially, the intermediary bears at least some of the cost and under contract law, the intermediary is responsible if things go wrong.

According to the Association of British Insurers (ABI) however, very little is known about the tax ¹. In this four-part series of articles Justine McInnes, who has been helping insurance intermediaries with IPT for over 20 years, discusses how an IPT cost arises for insurance intermediaries and how it can be reduced (covered in this article), how IPT risks can be mitigated, the common types of IPT error and some IPT oddities.

An insurance intermediary is any party that has a part in the arrangement of an insurance contract so can include insurance brokers, insurance agents, travel agents, suppliers of vehicles and suppliers of domestic goods, even where its role is very minor.

Like the vast majority of goods or services, buyers are very price-sensitive when selecting insurance ²: there is ultimately a limit on what someone will pay for an insurance policy – demonstrated for example, by the significant swing towards third party only cover during the cost-of-living crisis on the basis that it was considered to be cheaper³.

This makes it all the more important for insurance intermediaries to understand the cost to them of IPT, and how they can benefit from any IPT savings.

Taking a simple example:

• B Ltd is a broker working on a net rated basis, who sells car insurance policies via an aggregator website. Gross written premium (GWP) on the policies is ‘capped’ in accordance with the in-depth pricing analysis undertaken by B Ltd.
• In a 12 month period, B Ltd sells policies with total GWP of £11,200,000 – with the GWP charged on each policy being subject to this cap. Out of this, B Ltd has to pay £8,000,000 net premium to the insurer, I Ltd, plus the IPT for which I Ltd will have to account on the policies (£1,200,000). As a result, B Ltd keeps £2,000,000 (£11,200,000 less £8,000,000 less £1,200,000).
• Now let’s say B Ltd is able to reduce their IPT cost by differentiating between administration services which they provide as part of their brokerage services, and the brokerage services themselves (so-called “unbundling”),which in this case, reduces their IPT cost by 30%. On the assumption that the amount charged to the customer stays the same, the IPT due is £840,000. As a result, B Ltd now keeps £2,360,000, instead of £2,000,000 or alternatively, may decide to make the pricing of the policies more competitive by passing on some or all of the IPT savings to the customers.

The same principle generally applies for policies sold on a gross rated basis. So, if B Ltd is entitled to 20% commission on GWP (excluding IPT due):

• IPT-exclusive GWP where ‘unbundling’ has not been implemented will be £10,000,000 and therefore B will receive commission of £2,000,000. £10,000,000 x 20%.
• IPT-exclusive net GWP where the IPT cost has been reduced by ‘unbundling’ will be £10,360,000 and therefore Y will receive commission of £2,072,000 (£10,360,000 x 20%). Again, B Ltd may decide to make the pricing of the policies more competitive by passing on some or all of the IPT savings to the customers.

In addition to ‘unbundling’, there are numerous, and most importantly, non-aggressive, ways in which IPT cost can be reduced and the advantage of these is that they can be used even where GWP income is relatively modest; a few examples include:

• Using service contracts or trust vehicles instead of, or alongside, insurance policies.
• Ensuring cashbacks and free gifts are treated in an IPT-efficient way.
• Recognising the existence of separate contracts where goods/services are provided alongside policies.
• Effective apportionment of premiums between different risks.

The most effective methodology(ies) is/are determined by the nature and set up of the business and we would be very happy to discuss the IPT cost reduction approaches which would be most appropriate for your business.

The direct or indirect IPT cost suffered by insurance intermediaries is often overlooked. Investigating IPT cost reduction strategies should therefore be built into any considerations around cost reduction.

We have significant experience in this area and would be very happy to discuss how we can help you with this. Please do get in touch with your usual contact or Justine McInnes.

[1] ABI article (29 February 2024): Unmasked – the insurance industry gets snippy on IPT | ABI

[2] PwC UK Insurance Brand Sentiment Index 2022

[3] Independent article (20 November 2023): Tens of thousands of drivers switch to third-party insurance in desperate bid to cut costs | The Independent

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