If you’ve decided to invest in private and business health insurance, you may be wondering if you’ll have to pay taxes on top of your premium. We examine which taxes apply to health insurance and whether you have to pay VAT.
Do you have to pay VAT on health insurance?
The short answer is no, you do not have to pay VAT on insurance premiums. Insurance policies attract another type of tax called insurance premium tax.
If you are a company registered in the VAT system, you can charge clients and customers VAT on products and services and request a refund of the VAT you pay on business purchases. You will also be liable for income tax, from which you can deduct allowable expenses. The insurance premium is not subject to VAT, but is an allowable business expense for corporate income tax purposes.
Tax on insurance premiums applies to individuals and companies. Let’s take a closer look at how it works.
How does insurance premium tax work?
Insurance Premium Tax (IPT) applies to most policies. It’s included in the total cost of your insurance premiums, so the quotes you get from your insurance provider should include it, like the VAT liability on products you buy in shops or via websites. You don’t have to calculate what your tax bill will be. Sometimes your insurance quote will refer to IPT as part of the cost breakdown so you can see how much of the total premium paid is tax. However, your insurer is responsible for reporting and paying tax, so you don’t have to do anything.
There are two rates of IPT depending on the product you buy and who supplies it. The standard rate of IPT is 12% (which is cheaper than VAT) and applies to most insurance contracts, including health insurance policies.
The higher rate of IPT is 20% (same as VAT) and applies to travel insurance and other policies depending on who sells them. Most health insurance and reinsurance transactions are arranged by a broker or directly with the insurance company. However, you may sometimes be offered vehicle insurance, including rental cars, electrical appliances or other household goods when you purchase them. If the company that sells you the product or arranges the rental sells you insurance, a higher rate of 20% applies.
Are there any exemptions from IPT?
Long-term insurance contracts are exempt from insurance for IPT purposes. This means you won’t pay VAT or IPT on life insurance, critical illness insurance or income protection insurance as they provide a financial safety net for the future.
Other exemptions mainly benefit companies operating overseas as there is no IPT for contracts to insure commercial goods in international transport, commercial ships, aircraft and trains operating overseas or non-UK risks.
However, this does not apply to health insurance.
How have IPT rates changed?
As we mentioned, there are two rates of IPT: a standard rate that applies to most policies and a higher rate for some products, depending on the insurance you buy and who arranges the policy. However, rates have changed over time and there have been calls for the Government to reduce IPT to make insurance contracts more affordable, particularly for individuals on lower incomes who spend proportionately more on their insurance premiums.
The government introduced IPT in 1994. At that stage there was only a standard rate of 2.5% and no higher rate. The higher rate was introduced at 17.5% in April 1997, and in 2011 it was increased to 20%.
The standard rate has also gradually increased from 2.5% to 12%, although it has doubled since 2015. You can find out more about this here.
What does IPT mean for individuals buying private health insurance?
If you want to invest in life insurance, critical illness cover or income protection insurance to provide for yourself and your family if you become seriously ill or die, you won’t have to worry about IPT or VAT as they are both exempt.
However, if you want or need to drive, you are legally required to buy car insurance. Many mortgage lenders also insist on home insurance before you can get a mortgage. The Association of British Insurers believes this is unfair and has launched a campaign to reduce the IPT rate.
You don’t have to buy private health insurance if you don’t want to. However, it offers many benefits for you and your family, such as quick access to healthcare, support services such as helplines, 24/7 virtual GP services and self-help resources. Private medical insurance reward programs can also help you save money.
Although IPT is lower than VAT, the cost could affect how much you can afford to spend on private health insurance, meaning you lose out on some of the benefits. For example, most policies include basic coverage and additional extras at an additional cost. You may have to stick with a cheaper policy and lose access to things like extended mental health coverage and outpatient treatment.
If your employer provides health insurance as an employee benefit, the tax implications may affect the coverage you receive through employee health insurance.
How does IPT affect business?
Recent research shows that 69% of people would use private health insurance if their employer provided it. It is a highly valued employee benefit with many business benefits, including reduced sick leave. However, each company must weigh the benefits and tax implications before deciding whether to offer health insurance and how much to spend.
Although group private health insurance premiums are usually lower per capita than individual premiums, IPT can affect what cover your business can afford and what savings measures, such as increased excess, you can choose to apply to your policy.
There are also tax implications for your employees. Private health insurance is a benefit in kind, which means that they pay income tax on the value of the benefit.
As a business, you could choose to restructure the benefits you provide and invest more in employee life insurance, critical illness cover and income protection insurance, none of which attract IPT. Alternatively, you could consider setting up a health trust or a master trust. It’s more complicated than buying a private health insurance policy, but it can offer overall savings. Some health insurance providers offer a trust option as part of their service.
Getting professional advice
MyTribe guides are intended as general guidance on health and financial topics, but are not a substitute for professional advice. If you want to find out how health insurance can work for you or your company, contact us for a comparative quote. We will connect you with a regulated broker for high quality tailored advice.
Waiver: This information is general and what is best for you will depend on your personal circumstances. Talk to a financial advisor or do your own research before making a decision.
