Clause 129 increases the standard rate of insurance premium tax from 9.5% to 10% to raise revenue to invest in flood defence and flood resilience.
Insurance premium tax is due on general insurance premiums related to risks located in the UK regardless of where the insurer is based. It is charged as a percentage of the gross premium that an insurer charges, including any broker commissions and other directly related costs—so it is a charge on the insurer, not on the individual.
Insurance premium tax is due on general insurance, which accounts for approximately 20% of total insurance premiums. General insurance includes motor insurance, home insurance, employers’ liability insurance and medical insurance. Approximately 80% of insurance premiums are exempt from insurance premium tax. Exempt insurance includes long-term insurance such as life insurance and critical illness cover. Long-term insurance products are exempt from insurance premium tax to avoid creating a distortion between savings products and long-term insurance products, which can serve the same purpose for consumers. Reinsurance is also exempt to avoid double taxation.
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Most insurance subject to insurance premium tax is taxed at the standard rate, which will be increased to 10%. There is also a higher rate of insurance premium tax that applies to travel insurance and to certain warranty insurance. This is charged at the higher rate of 20% to prevent VAT avoidance and it is unaffected by this change. Although insurance premium tax is charged on general insurance, there is no VAT at all on any sort of insurance.
Clause 129 sets out an increase in the standard rate of IPT from 9.5% to 10%, which will raise around £210 million a year to be used to fund investment in flood defences and resilience. Over this spending review period, we will spend an extra £700 million on flood defence and resilience measures in England. This is in addition to our existing £2.3 billion flood defence capital programme.
As announced in the Budget, the additional investment in flood defences will be split between maintenance and capital spending. Maintenance funding will be increased by £40 million a year, taking it to more than £1billion in total over this Parliament. This will help to protect an extra 20,000 homes by keeping existing defences operational. In the Budget, the Government also announced over £150 million of additional capital spending, which will fund schemes in areas affected by last December’s floods. This will include £115 million for Yorkshire with schemes in Leeds, York and the Calder valley better to protect 3,000 homes and 1,700 businesses. Some £33 million will be invested in Cumbria better to protect 1,700 properties and key local infrastructure.
The findings of the national flood resilience review, which is considering the resilience of our communities and infrastructure, will help the Government to decide how remaining funding is to be spent. It will report in the autumn. As flood defence spending is a devolved matter, the Barnett formula will be applied in the normal way, and funding will be provided to the devolved Administrations in line with that being spent in England.
The new standard rate of IPT will be 10% and will take effect from 1 October 2016. This change will directly affect all insurers who write premiums for general insurance. It may also affect businesses and households that purchase general insurance, if those insurers choose to pass on the additional cost of the tax on to their customers. As I said, IPT is a tax on insurers, so it is for insurers to decide whether to adjust their prices in response to this rate change.
Many factors affect the cost of insurance. These include the insurer’s assessment of risk, competition in the market and how well insurers’ investments are performing. Insurers’ costs also affect pricing and, in common with other businesses, they have benefited from cuts to corporation tax. Even if insurers decide to pass on the entire impact of the rate change, this would add only about £1 to the average home and contents insurance policy and £2 to the average motor insurance policy.
Increasing the standard rate of IPT by 0.5% will raise revenue to invest in flood defence and resilience, which will enable us better to protect against floods such as those we saw last winter. This clause should therefore stand part of the Bill.