Is There VAT on Car Insurance?

Value Added Tax (VAT) is a tax charged on many goods and services in the United Kingdom. However, when it comes to car insurance and insurance in general, you pay a different tax to the government, which is known as Insurance Premium Tax (IPT).

In this guide, we walk you through what IPT is, what the rates are and how it will affect your car insurance premium.

You don't pay VAT on car insurance. Instead, you pay Insurance Premium Tax. IPT is a tax applied to insurance premiums, and when you pay your provider for your policy, the insurer forwards this tax to the UK government. There are two rates of IPT:

Standard rate IPT: 12%
Higher rate IPT: 20%

For car insurance, you typically pay the standard rate of IPT. However, some newer cars are eligible for the higher rate if you buy them directly from a car dealership.

Disabled drivers leasing a car through the Motability Scheme, learner drivers and drivers with motor trade insurance are exempt from paying IPT.

How does IPT affect my car insurance premium?

Since the government generally imposes a 12% Insurance Premium Tax on car insurance, the higher your premium, the more tax you'll pay.

For example, if your over 50s car insurance premium is £200, adding 12% IPT brings the total to £224, with £24 being the tax. However, if your premium is £500, the total cost will be £560, which includes £60 in tax.

What are the differences between VAT and Insurance Premium Tax (IPT)?

In the United Kingdom, VAT (Value Added Tax) and IPT (Insurance Premium Tax) are both forms of taxation, but they apply to different transactions and have distinct rates.

VAT is applied on most goods and services, with a standard rate of 20%. Some items qualify for reduced rates of 5% or even zero rates. Businesses can often reclaim VAT on expenses related to their business activities.

IPT, on the other hand, is specifically charged on insurance premiums, including car and home insurance. The standard rate for IPT is 12%, with a higher rate also set at 12%. Unlike VAT, you can’t reclaim IPT, regardless of whether you’re a business or a consumer.

Can I claim IPT back on car insurance?

You can’t claim Insurance Premium Tax back on car insurance. After it’s been paid as part of your car insurance premium, it’s not recoverable.

When was Insurance Premium Tax introduced?

Insurance Premium Tax was introduced in the UK on 1st October 1994. The government implemented this tax to address the under-taxation of the insurance sector and to generate additional revenue.

What does IPT pay for?

Insurance providers are responsible for sending IPT to HMRC after you pay for your car insurance. HMRC use the money to fund public services like healthcare, education and social care.

How has IPT increased over the years?

When Insurance Premium Tax started in 1994, the standard rate was 2.5%. It has gradually increased over the years to keep up with industry changes and prevent tax avoidance. The latest increase was in 2017, raising the standard rate to 12%.

In 1997, the government introduced a higher rate to prevent VAT avoidance. It began at 17.5% and has been 20% since 4th January 2011.

Who are Saga's car insurance policies underwritten by?

Saga’s car insurance policies, exclusively for people over 50, are unique products designed by us specifically for our customers. They are underwritten by a number of carefully selected insurers that provide high standards of quality and service.