An increase in IPT should not see a flood of changes.

March 21, 2016 Diana Niculaes

The last winter was one of the warmest and wettest on record. News reports of floods appeared all too often on our television screens. The good news is the government intends to increase spending on flood defences, but it has no intention of paying for it.

It was Benjamin Franklin who first used the expression “in this world nothing can be said to be certain, except death and taxes”. This is very apt in light of the recent announcement by the Chancellor that he intends to increase the level of Insurance Premium Tax (IPT), as it reinforces what is and what isn’t within the control of employers when managing their employee benefits.

When the increase in IPT from 6% to 9.5% with effect from 1 November 2015 was announced last year the benefit industry reacted with an array of negative predictions for the private medical insurance market, none of which have come to pass.

I am not suggesting that employers were happy about paying an increased premium, but we didn’t see a long line of companies asking for their schemes to be cancelled as the 3.5% cost increase was too much to bear. We did, however, see a number of clients investigate Healthcare Trusts as an option, but ultimately the fervour died down and very little has actually changed.

So, here we are again. The Chancellor is looking to increase tax revenue and has looked to a further increase in IPT as an easy option. The new increase from 9.5% to 10% from 1 October 2016 is lower than feared, but still a big hike from the standard rate of 6% which was the rate some eight months ago. This increase, to help fund the UK’s flood defences, also means we have the joint highest tax on healthcare in the EU, matched only by Greece.

So what is IPT? It’s a tax on general insurance premiums including home insurance, car insurance and travel insurance. It was first introduced in 1994. There are two bands, the basic one with which this article is concerned is set to rise to 10%, and 20% which applies for example to travel insurance.

We are not going to stop the Chancellor from using the IPT as a source for income, but we can have an impact on the overwhelming majority of scheme costs that are not within his grasp.

This small increase to basic rate IPT is unlikely to cause knee jerk reactions with employers looking for a quick fix by reducing benefits. It might act as a catalyst for employers to start changing the benefit landscape and investing to meet the future needs of employers and employees.

Companies should take this opportunity to ‘future proof’ their benefits:

  • review existing arrangements – potential to offset IPT increase by reduction in cost of other benefits
  • invest in new wellbeing strategies – every £1 invested in wellbeing can deliver up to £3 of savings in the future.
  • challenge the insurers to deliver efficiencies and innovate products that target prevention as well as treatment – any reduction in the overall claims costs will reduce IPT burden
  • introduce robust tools and processes to reduce absence costs
  • feasibility studies to review private medical funding options

Companies should see this as an opportunity to take a fresh look at their overall benefit spend and, by using a combination of product innovation and expert consultancy, should be able to provide a more effective and efficient benefit proposition, easily offsetting the increased costs of IPT.

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