Do you pay VAT on health insurance?

If you’ve decided to invest in health insurance for yourself or your business, you might wonder whether you’ll need to pay tax on top of your premium. We examine which taxes apply to health insurance and whether you must pay VAT.

Do you have to pay VAT on health insurance?

The short answer is no, you don’t have to pay VAT on insurance premiums. Insurance policies attract a different type of tax called the Insurance Premium Tax.

If you’re a VAT-registered business, you can charge clients and customers VAT on products and services and claim back any VAT you pay on business purchases. You’ll also be liable for corporation tax, where you can deduct allowable expenses. An insurance premium has no VAT liability but is an allowable business expense for corporation tax purposes.

Insurance premium tax applies to individuals and businesses. Let’s look at how it works in more detail.

How does the Insurance Premium Tax work?

Insurance Premium Tax (IPT) is applied to most policies. It’s included in the total cost of your insurance premiums, so the quotes you receive from insurance providers should include it, like the VAT liability on products you buy in the shops or via websites. You don’t have to work out 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 insurance provider is responsible for registering and paying the tax, so you don’t need 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% (so cheaper than VAT) and applies to most insurance contracts, including health insurance policies.

The higher rate of IPT is 20% (the 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 an insurance company. However, sometimes you might be offered insurance on vehicles, including hire cars, electrical appliances or other household goods when you buy them. If the business selling you the product or arranging the hire sells you the insurance, the higher rate of 20% applies.

Are there any IPT exemptions?

Long-term insurance contracts are exempt insurance for IPT purposes. This means you won’t pay VAT or IPT on life insurance, critical illness cover or income protection insurance as they provide a financial safety net for the future.

Other exemptions mainly benefit businesses that trade abroad as there’s no IPT on insurance contracts for commercial goods in international transit, commercial ships, aircraft and trains operating overseas or risks outside the UK.

However, it doesn’t apply to health insurance.

How have IPT rates changed?

As we’ve discussed, 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 lower-income individuals 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 increased to 20% in 2011.

The standard rate has also gradually increased from 2.5% to 12%, although it has doubled since 2015. You can find out more here.

What does IPT mean for individuals buying private medical insurance?

If you want to invest in life insurance, critical illness coverage, or income protection insurance to provide for you and your family if you become seriously ill or die, you won’t have to worry about IPT or VAT as it’s exempt from both.

However, if you want or need to drive, you’re 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 think this is unfair and has launched a campaign to reduce the IPT rate.

You don’t have to buy private medical 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 like telephone helplines, 24/7 virtual GP services and self-help resources. Private medical insurance reward programs can also help you save money.

While IPT is lower than VAT, the cost could impact how much you can afford to spend on private medical insurance, meaning you will lose some of the benefits. For example, most policies include core coverage and optional extras at an additional cost. You may need to stick to a cheaper policy and lose access to things like extended mental health coverage and out-patient treatment.

If your employer provides health insurance as an employee benefit, the tax implications may affect the coverage you receive via your employee health insurance.

How does IPT affect businesses?

Recent research suggests that 69% of people would use private medical insurance if their employer provided it. It’s a highly valued employee benefit with many business advantages, including reduced sickness absence. However, each company must weigh up the benefits and tax implications before deciding whether to offer health insurance and how much they can afford to spend.

While group private medical insurance premiums are typically lower per head than individual premiums, IPT may still impact what coverage your business can afford to offer and what cost-saving measures, such as an increased excess, you may choose to apply to your policy.

There are also implications for your employee’s taxes. Private medical insurance is a benefit in kind, meaning they pay income tax on the value of the benefit.

As a business, you could opt 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 healthcare trust or master trust. This is more complex than buying a private medical insurance policy but can offer savings overall. Some health insurance providers provide a trust option as part of their service.

Getting professional advice

MyTribe guides are intended as general guidance on health and finance topics but are no substitute for professional advice. If you’d like to discover how health insurance could work for you or your business, contact us for a comparison quote. We’ll connect you with a regulated broker for high-quality tailored advice.

Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.