When you get your business insurance renewal quote, you probably just look at the bottom line figure, wince a little, and pay it. We’ve all been there. You know you need the cover to operate legally and safely, so you grit your teeth and sign the dotted line.
But have you ever stopped to look at why that figure is so high?
Here is a statistic that might surprise you: Since its introduction in 1994, the standard rate of Insurance Premium Tax (IPT) has risen from a tiny 2.5% to a hefty 12%. That is a significant jump. In fact, revenue from this specific tax more than doubled between 2012 and 2022. It’s a "silent" cost that creeps up on businesses, often unnoticed because it’s bundled into a necessary purchase. For other silent business killers in 2026, check our blog on Stealth Tax here.
As we look ahead to financial forecasting for 2026, understanding exactly what you are paying and why is crucial for keeping your overheads in check. If you feel like your premiums are spiralling, it’s not just the insurers increasing their prices; the taxman is taking a bigger slice of the pie too.
How does insurance premium tax work?
Insurance Premium Tax (IPT) is a tax on general insurance premiums. Think of it as the insurance world’s equivalent of VAT, but with different rules and different rates.
Technically, IPT is a tax levied on the insurer, not directly on you. However, in the vast majority of cases (read: almost always), the insurer passes this cost 100% onto the customer. It’s added to the base premium of your policy.
So, when you take out a policy whether it’s for your office building, your company van, or your public liability cover the price you are quoted usually includes this tax. It applies to most general insurance policies where the risk is located in the UK.
While it feels like just another line on an invoice, it’s a mandatory government levy. The insurer collects it from you and hands it over to HMRC. You don’t have a choice in paying it, but knowing how it works helps you understand your true business costs.
How to work out IPT on a premium?
Working out IPT isn’t rocket science, but it does require you to know which "rate" your insurance falls under (we’ll get to that in a second).
The tax is calculated as a percentage of the premium net of tax.
If your insurer quotes you a price "including IPT," the math has already been done for you. However, if you are looking at a "net premium" or trying to budget for the future, you need to apply the percentage to the base cost of the insurance.
The basic formula is:
Net Premium x Tax Rate = IPT Amount
Net Premium + IPT Amount = Total Price You Pay
It is important to note that IPT is usually calculated on the premium after any broker fees or commissions are added, depending on how the policy is structured, but it is generally applied to the amount the insurer receives for the risk.
What are the two main rates of IPT in the UK?
Unlike VAT which has a standard rate of 20% for most things, IPT operates with two distinct tiers. Knowing which tier your policy falls into is essential for accurate budgeting.
As of current government guidance (and pertinent for your 2026 planning unless a new Budget shakes things up), the rates are:
| Rate Type | Percentage |
| Standard Rate | 12% |
| Higher Rate | 20% |
Most business owners will deal primarily with the standard rate, but the higher rate can catch you out if you aren't paying attention.
What is 12% IPT in the UK?
The Standard Rate of 12% applies to the vast majority of general insurance policies. If you are a standard small business owner, this is the rate you will see most often on your documents.
This rate covers:
- Commercial Combined Insurance: Your standard business protection.
- Motor Insurance: Unless it’s a special category, your van or fleet insurance sits here.
- Public and Employers' Liability: Essential covers for hiring staff and interacting with the public.
- Property and Contents Insurance: Protecting your office or stock.
- Pet Insurance: If you have a business dog or cat, or purely for personal policies.
Basically, if it’s a "normal" insurance policy protecting your business assets or liabilities, you should be budgeting for a 12% tax on top of the premium.
What is 20% IPT in the UK?
The Higher Rate of 20% is designed to align with the standard rate of VAT. This was introduced to stop companies from "value shifting"—essentially manipulating prices to pay less tax.
You will pay 20% tax on:
- Travel Insurance: Whether for business trips or personal holidays.
- Electrical Appliance Insurance: If you buy insurance for your office computers or fridges from the supplier rather than a standalone insurer.
- Motor Vehicles sold by suppliers: Specifically, insurance sold by car dealers or hire companies (like guaranteed asset protection or hire car insurance) often attracts this higher rate.
If you are a business that travels frequently or leases equipment with added insurance warranties, you need to watch out for this 20% hit.
Is there VAT on Insurance Premium Tax?
No, there is no VAT on top of Insurance Premium Tax. It’s one of the most common questions we get, and the answer is a firm no.
Insurance is generally exempt from VAT (Value Added Tax). You do not pay VAT on insurance premiums. Instead, you pay IPT.
Here is the sting: Because it is not VAT, you cannot claim it back.
If you are a VAT-registered business, you are used to reclaiming the 20% VAT you pay on laptops, stationery, and fuel. IPT is different. It is an end-user cost. It sticks to you. You cannot put it on your VAT return as input tax. It is a sunk cost for your business, just like the salary you pay your staff.
This makes it even more important to negotiate your base premiums, because every pound you save on the premium also saves you 12p (or 20p) in tax that you will never see again.
To find out everything you need to know about VAT discounts and exemptions, tips to save big, read here.
How to calculate IPT?
Let’s get into the nitty-gritty of the calculation so you can check your own invoices.
Scenario A: You have the Net Premium
If a broker tells you the insurance cost is £1,000 + Tax:
- Identify the rate (e.g., Standard Rate 12%).
- Calculate 12% of £1,000 = £120.
- Total cost = £1,120.
Scenario B: You have the Gross Premium (Total Cost) and want to know the tax portion
If you have paid £560 total and want to know how much was tax (at 12%):
- Divide the total by 1.12.
- £560 ÷ 1.12 = £500 (This is the Net Premium).
- The difference (£60) is the IPT.
Scenario C: You have a Higher Rate policy (Total Cost)
If you paid £120 for travel insurance (at 20%):
- Divide the total by 1.2.
- £120 ÷ 1.2 = £100 (Net Premium).
- The difference (£20) is the IPT.
IPT real-life example
Let’s look at a fictional business, "BrightSpark Creatives Ltd", a small graphic design agency in Manchester.
The Scenario:
They are renewing their insurance for the year 2026. They need office insurance (contents/buildings) and business travel insurance for their sales director who visits clients in Europe.
Policy 1: Office & Liability Package
- Net Premium quoted by broker: £2,500
- IPT Rate: Standard (12%)
- Calculation: £2,500 x 0.12 = £300 IPT.
- Total Cost: £2,800.
Policy 2: Annual Business Travel Policy
- Net Premium quoted: £400
- IPT Rate: Higher (20%)
- Calculation: £400 x 0.20 = £80 IPT.
- Total Cost: £480.
The Financial Impact:
BrightSpark Creatives Ltd pays a total of £3,280 for their insurance. Of that total, £380 is purely tax.
They cannot reclaim that £380 on their VAT return. It is a direct hit to their bottom line.
If they hadn't budgeted for the different rates, or assumed they could reclaim 20% of the total cost like a standard VAT invoice, they would be staring at a hole in their cash flow forecast.
DR and Key Takeaways
Short on time? Here is the cheat sheet for IPT:
- It’s a Tax, Not VAT: You pay IPT on insurance, not VAT.
- You Can’t Claim it Back: Unlike VAT, businesses cannot reclaim IPT. It is a final cost.
- Standard Rate is 12%: This applies to most business covers like liability, property, and motor.
- Higher Rate is 20%: This hits travel insurance and insurance sold by vehicle/appliance suppliers.
- It Adds Up: On a large premium, 12% is a significant chunk of change. Negotiating your net premium is the only way to lower the tax bill.
- Check the Exemptions: Life insurance and some sickness policies are usually exempt.
Why this matters for your 2026 Planning
You might be wondering why we are talking about 2026 when tax rates are set in budgets. The reality is that insurance is one of those "sticky" costs that tends to rise.
While the current rates are 12% and 20%, the government reviews these regularly. Given the history of IPT rising from 2.5% to 12% over the last few decades, it is a prime target for revenue-raising. When you are building your long-term budgets or looking at multi-year insurance deals, factor in the IPT cost.
Don’t just renew automatically. Challenge your broker on the net premium. Remember, every pound you shave off the policy price also lowers your tax liability. That’s smart business.
Stay compliant, stay insured, but don't pay a penny more than you have to.
