If you have ever taken out an insurance policy in the UK, you might have asked yourself: is there VAT on insurance? Many people assume the extra charge on top of a premium is VAT, but in most cases, that is not true. Insurance in the UK is generally exempt from VAT. Instead, a separate tax called Insurance Premium Tax, or IPT, applies to most insurance products.

Understanding this difference can help you see exactly what you are paying for and avoid confusion when reviewing your insurance policies.

In this article, we explain what VAT and IPT mean for insurance, the types of insurance affected, how IPT is calculated, and any exceptions that exist. By the end, you will know exactly how insurance is taxed in the UK.

Why insurance doesn’t have VAT

If you’ve found your way to this article, you’ve likely wondered, is there VAT on insurance? The answer is no. VAT (or Value Added Tax) applies to most goods and services in the UK at a standard rate of 20%. However, there are a few exceptions, and insurance is one of them.

Insurance is treated as a financial service in the UK, and as a general rule, financial services are exempt from VAT. Though there are exceptions. This means the premium you pay an insurance provider is not subject to VAT, even though it covers a service provided by the insurer. 

Please note though, that this doesn’t mean insurance is tax-free. Instead, most insurance premiums are subject to something called Insurance Premium Tax.

What is Insurance Premium Tax?

Insurance Premium Tax (or IPT) is a tax specifically applied to insurance premiums. It was introduced in 1994 to make sure insurance contributions carry a tax element. Similar to VAT, IPT is classed as a consumption tax. The difference however is that it only applies to insurance, and not all goods and services. 

Insurers collect IPT and pass it on to HMRC, which means the premium you pay usually already includes Insurance Premium Tax.

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The two main rates of IPT

These rates of Insurance Premium Tax are set by the government and can change over time. The most recent increase was in 2017, when the standard rate went from 10% to 12%, see below for more information.

Which types of insurance are subject to IPT?

In truth, most policies are subject to IPT, it’s just the rate that will differ depending on type of insurance. 

Standard rate - 12%

Here are a few examples of where the standard rate applies:

• Motor insurance.
• Home insurance, including buildings and contents.
• Commercial insurance, such as liability or property coverage for businesses.
• Pet insurance.

Higher rate - 20%

In comparison, below are the types of insurances that attract the higher rate of IPT:

• Travel insurance.
• Insurance for events outside the UK, such as holiday cancellation.
• Some extended warranty or gadget insurance policies.

Are any insurance policies exempt from Insurance Premium Tax?

Yes, although most insurance types attract IPT, there are a few that don’t. For example; life insurance, permanent health insurance, and certain reinsurance contracts.

How is Insurance Premium Tax calculated?

IPT is charged as a percentage of the premium. Unlike VAT, which businesses can sometimes reclaim, IPT cannot usually be reclaimed. It is just part of the total insurance cost.

Here is an example:

If you buy a home insurance policy with a premium of £500 and the standard IPT rate of 12% applies:

Premium before IPT: £500
IPT at 12%: £500 × 12% = £60
Total premium including IPT: £500 + £60 = £560

For travel insurance at 20% IPT:

Premium before IPT: £100
IPT at 20%: £100 × 20% = £120

Most insurance providers will either show IPT as a separate line or include it in the total premium. It is worth checking to avoid any surprises.

Why Insurance Premium Tax exists instead of just charging VAT

You might still ask: is there VAT on insurance? The law treats insurance as a financial service, so it is VAT-exempt. IPT was introduced to make sure insurance still contributes to tax revenue. Because IPT is targeted, it is only applied to insurance premiums where a consumption tax is appropriate, such as motor or travel insurance.

Special cases and exceptions

Some insurance policies are exempt from IPT:

• Life insurance and permanent health insurance: Considered long-term financial products.
• Certain reinsurance contracts: Insurance for insurers.
• Excess-only or top-up policies: Some niche policies may have special tax treatment.

Always check with your insurance provider if you are unsure whether IPT applies.

How to check IPT on your insurance policy

Most providers will show IPT clearly on your quote or invoice. Look for a line labelled Insurance Premium Tax or IPT, or check if it is included in the total premium.

For businesses, recording IPT separately in your accounts is a good idea, even if it cannot be reclaimed. This ensures you have a clear picture of insurance costs.

Comparing IPT with VAT

To give a clearer picture of how IPT compares with VAT across different products, the table below highlights the key differences:

This shows why people often confuse IPT with VAT. The short answer is: insurance does not have VAT, but it does have IPT.

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How does IPT affect Limited Companies and Sole Traders?

For business policies, such as professional indemnity, public liability, or company vehicle insurance, IPT is included in the premium. Unlike VAT, it cannot be reclaimed, so it should be accounted for as part of your total business costs. Keeping track of IPT separately in your accounts can help you understand your actual expenses and avoid surprises at renewal time.

Here is a table showing the main types of insurance, the IPT rate that applies, and whether VAT is charged or can be reclaimed:

IPT and claims

IPT only applies to the premium itself, not to claims payments. For example, if you make a motor insurance claim, the payout to repair your car will not include IPT. This is different from some other taxes and means you are only taxed on coverage, not on compensation.

What this means

Once you know the answer to the question “Is there VAT on insurance?” it becomes much easier to understand what you’re actually paying for. Insurance premiums are exempt from VAT, with Insurance Premium Tax (IPT) often applied instead.

For businesses, it’s just one of many small details that can affect costs and cash flow. At Crunch, we help Sole Traders and Limited Companies keep track of expenses like insurance properly. Whether you want to do-it-yourself with our free software, or whether you want it all done-for-you with expert accountants in your corner, we’ve got you covered.