Electric Car Chat

Insurance Premium Tax: What Every Car Buyer Should Know

• Graham Hill • Season 2 • Episode 6

Share episode

Send us a text

Insurance Premium Tax (IPT) is a hidden cost applied to car insurance products that varies depending on where you purchase them, with dealer-arranged products typically costing 8% more in tax than those bought directly from insurers or independent brokers. This tax difference can significantly impact the total cost of vehicle ownership, yet most consumers remain unaware of this variation or how it affects their purchase decisions.

• IPT is charged at 12% when buying insurance from independent brokers or directly from insurers
• Dealer-arranged insurance typically attracts 20% IPT, except for standard car insurance and financial GAP insurance
• IPT has gradually increased from 2.5% when introduced in 1993 to the current 12% standard rate
• "Free" dealer insurance often leads to attempts to convert customers to full policies, potentially costing drivers up to £2,000 more
• All insurance policies can be cancelled within 14 days for a full refund (minus possible cancellation fees)
• Modern cars already have robust paint protection, making dealer add-ons often unnecessary
• Consider practical coverage like breakdown recovery, especially after manufacturer coverage expires

If you want to receive all of my podcasts, please subscribe either on the channel you found this on or by going to grahamhilltraining.com/podcast. The new 2026 update of my book "Electric Cars the Truth Revealed" will be sent free to those who purchase the current version.


To buy a copy of Electric Cars - The Truth Revealed visit grahamhilltraining.com. If you are interested in sponsoring this podcast or would be interested in working together please visit grahamhilltraining.com/contact


Hi, today’s podcast will be short but just as important as all the podcasts in this insurance series. More and more people are being enticed into taking add-on insurance products whether they’re buying or leasing a new or second-hand car. Most of the products are offered by the dealer and can be added into the car finance giving the dealers a double hit.

They earn some commission out of the sale of the insurance products as well as a small portion of the interest when added into the cost of the car. I’m not going to talk about the individual products in today’s podcast but I’ll be talking about them in general and in particular, something called Insurance Premium Tax or IPT.

So, first of all we need to understand what these insurance products are because not everyone believes them to be insurance products. Obviously, your car insurance is an insurance but so is an extended warranty, alloy wheel protection, minor damage protection, tyre cover, roadside assistance and so on. I’ll be covering these insurance products in detail in another Insurance podcast. 

Whilst it may be possible to buy the products cheaper online, there could be other reasons to buy from the dealer. The cover offered by the dealer may be geared specifically towards their own makes of cars and it may be easier to have the cost included in the finance. In the case of say minor damage or extended warranty insurance it may be easier to make a claim via the supplying dealer who will probably deal with the insurance company on your behalf. Again, I’ll have more to say on this later.

Insurance Premium Tax or IPT is the equivalent to VAT applied to insurance products. But here’s something that many people don’t know. IPT can be applied at different rates depending on where you get your insurance from. If you buy the insurance via an independent broker or direct from the insurance company you’ll only pay 12% IPT. An independent broker means that they haven’t any connection with the dealer from whom you’re buying the car. On the other hand, if you arrange the insurance via the dealer or a broker recommended by the dealer you will pay 20% IPT, a full 8% more than your own internet sourced provider. 

IPT is applied across the EU and is country dependent. Ken Clarke, the Chancellor introduced IPT in 1993. He really wanted to apply VAT to insurance products but this was against European law at the time. He needed to raise tax revenues so whilst he couldn’t apply VAT to insurance products he felt that financial services in general were unfairly under taxed when compared to other areas such as manufacturing. So whilst he was stopped from charging VAT he said, ‘There are no restrictions of this nature on Member States charging excise duties on insurance premiums, and historically most Member States have charged taxes with rates significantly higher than the UK’s.’ As a result he managed to introduce this duty, called Insurance Premium Tax or IPT without much opposition from the industry. The move brought us in line with the practices in most of Europe and the United States. 

The lack of outrage was possibly helped by the fact that the initial level was set at just 2.5%. In 1996, the budget increased it to 4% with a second tier applied to the selling of insurance alongside products that attract VAT. So take out a warranty insurance from the dealer at the same time as you buy the car and you will pay IPT in line with VAT, at the time it was 17.5%.

In 1997 the Government removed car insurance sold by car dealers from the higher rate of IPT and more recently also removed Financial GAP from the higher rate of IPT when sold by the dealer. In 1999 the lower rate was increased to 5%, in 2011 it was increased to 6%, In 2015 it was increased to 9.5% and in 2016 increased further to 10% reaching its current level of 12% in 2017. Throughout this time the higher level of IPT has matched VAT at 20%, where it is now. 

Currently twenty-seven European countries have some form of indirect taxation on insurance contracts. For example, in Germany the IPT rate matches the VAT rate of 19%, in Italy the IPT rate is 21.25%, and in the Netherlands it is 21%. So, with the Chancellor looking for ways to raise more money in the 2025 Autumn Budget I wouldn’t be surprised if she didn’t increase the lower rate by a few % to maybe 15%. 

So to be clear there are two exceptions to the rule that if insurance products are sold along with vatable goods they automatically attract the higher rate of IPT, i.e. 20%. The two are car insurance and financial GAP when taken out via the dealer. In those cases you will only pay the lower rate of IPT, currently 12%. All other insurance products are 20% via the dealer and 12% via an independent broker or direct via the insurer.

I’ve occasionally been asked, ‘Who would consider taking out their normal car insurance via the dealer? Surely people would use the comparison sites or have their favourite provider or broker?’ That’s a very valid question. In terms of IPT there’s no difference, all policies are calculated at 12%. Dealer provided car insurance is often down to the free insurance offered to the customer. Let me explain this. I should add at this point that taking the free insurance can be detrimental so I’ll be issuing a separate podcast just on the subject of free insurance. In the meantime, here’s the procedure. 

When you buy a new car, it must be registered by the supplying dealer with the DVLA. Once registered you’ll be sent the V5C or as we know it as, the Log Book. Along with various pieces of paperwork the dealer must provide either an insurance certificate or insurance covernote when registering the car. Even after many years of doing this, dealers and customers often have problems obtaining covernotes from the customer’s own insurance company before the car is registered, often holding back registration and delivery of the car to the customer. 

So a few years ago a solution was found by dealers joining forces with major insurance companies, mainly Aviva, who would provide 5 or 7 days free, fully comprehensive insurance. They would take a few details over the phone from the customer along with car details supplied by the dealer such as full description of the car, its list price including any extras and, in the case of ICE cars – the engine size. They then issue a short period covernote, long enough for the dealer to get the car registered. It was then up to the customer to arrange her new policy with her insurer of choice to take over at the end of the free period. 

Now, in the meantime, there was an arrangement between the dealer and the insurer whereby acceptance by the customer (simply by taking the free insurance) gave permission for the free insurance provider to contact the customer in order to quote on the full policy and in a few cases the customer is convinced to take out the full policy with the free insurance provider. As a result, the dealer may be paid a commission. And this is how a customer may occasionally take out her car insurance via the dealer.

But things are never that straight forward so as I mentioned I’ll be creating a podcast explaining the dangers of taking out the free car insurance and how one driver could easily have been close to £2,000 out of pocket by accepting the free insurance. 

There is a lengthy technical reason why IPT on Financial Gap is always 12% whilst Back To Invoice GAP and Replacement GAP will attract either 20% or 12% IPT depending on whether you buy the insurance via the dealer or elsewhere. 

There is something else that has caused a little bit of concern and that is an extended warranty insurance. I have had customers send me copies of extended warranty insurance invoices showing 20% VAT issued by the dealer and no mention of IPT. As you, the customer, would pay 20% if the invoice showed IPT instead of VAT it will have no effect on the cost to you or the warranty agreement that you’ve purchased. However, the dealers have been known to recategorize the product as non-insurance attracting VAT, not IPT. Not something to worry about. If you’re a business you can recover the VAT as input tax, something you can’t do if charged IPT. 

There is a general rule that you can cancel any insurance policy at any time and have refunded any unused premium. This will also include a refund of the IPT paid. If you cancel within 14 days, known as the cooling off period, you can claim a full refund. The 14 days starts from the day you bought the policy or received the documents, whichever the later. That is your legal right if cancelled within the cooling off period, but beware, you could be charged a cancellation fee, even during the cooling off period. This fee will be less than the cancellation fee if you were to cancel after the cooling off period but it’s still a fee, no doubt aimed at preventing you from cancelling once you’ve taken out the insurance.

Typically, you’ll be charged £24 during the cooling off period, £50 thereafter. Check the policy before taking out the insurance. It’s not clear cut that you either will or won’t be charged IPT on the cancellation fee. Again, check the policy. Also, some insurers provide a 30 day cooling off period with others charging nothing to cancel the policy within the cooling off period. Always check these details before taking out the policy.

HERE'S A WARNING: I’ve seen examples where customers have been quoted for a particular insurance by a used car dealer. After checking on-line customers have found the dealer insurance to be cheaper so agree to go ahead with the car dealer. Only to find that the dealer has added the 20% IPT after agreeing to take it out. When challenged the dealer explains that all insurance has the IPT added when you take it out. That’s incorrect. All premiums must include IPT, this is why most people are unaware of the existence of it. 

If the insurance has been included in the finance and you cancel you may have the full premium returned less any cancellation fee but by not having the premium deducted from your finance agreement you’ll still be paying monthly including interest on the premium. You should really have no refund, just a new contract excluding the cancelled policy. 

If you’re a business you can’t add in the IPT to your VAT return as input tax as it’s nothing to do with VAT and not recoverable.

So, in summary, first of all don’t get talked into taking out insurances that you may not need. Whilst it’s not an insurance product the extra paint protection that the dealer generally offers you is probably unnecessary. Modern paint finishes are tough enough to withstand the rigors of extreme weather and natural challenges such as bird droppings and tree sap. If you suffer with this you can buy plenty of product that can take little time to apply to the car and provide ample protection. 

With regard to insurance products such as Alloy Wheel Protection, Breakdown Recovery, Minor Damage Cover these are just a few that I would give serious consideration to. When it comes to breakdown recovery provided on a new car some manufacturers only cover you for the first 12 months, not, as many assume, for the length of the warranty. If you lease the car for say 3 years the rental will include the road fund licence (car tax) and often cover breakdown insurance if the manufacturer doesn’t cover the car for the period of the lease, once the cover expires. You must check with the dealer and the finance company as to the length of breakdown cover. And always store the number of the breakdown service in your mobile phone in case of emergency.

I’ll try to put out a podcast explaining all the different types of insurance cover and other ‘add ons’.   

OK that’s the end of this short podcast dealing with IPT. If you want to receive all of my podcasts please subscribe, either on the channel you found this on or by going to grahamhilltraining.com/podcast. 

I’m the author of Electric Cars - The Truth Revealed on which many of my podcasts are based. If you want to buy a copy of that book, you can download the current book by going to grahamhilltraining.com and buy it for just a few pounds. The new 2026 update of the book will be sent out free of charge to all of those who have purchased the current book. The new book will contain major updates including a section on my recommended finance. For a few pounds more you can pre-order the training which will hopefully be coming out in early 2026 when the course will cost hundreds of pounds. 

If you are a supplier of anything EV related and would like my involvement or would like to sponsor this podcast please contact me at grahamhilltraining.com/contact

Look forward to chatting to you on the next one, I’ve been Graham Hill, still making a ruckus, bye for now.