Is There VAT on Car Insurance or Insurance Premium Tax?

There is no VAT on car insurance in the UK. Insurance is exempt from Value Added Tax under UK and EU law, but a separate levy called Insurance Premium Tax (IPT) applies to motor policies at 12%. So while your premium doesn’t carry the 20% VAT you’d see on most goods and services, it isn’t tax-free either.

Why Insurance Sits Outside VAT

Insurance is treated as a financial service, and financial services fall outside the standard VAT system. The exemption comes from Article 135(1)(a) of EU VAT Directive 2006/112/EC, which covers “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents.”¹ The UK carried this into domestic law through Schedule 9, Group 2 of the Value Added Tax Act 1994, which exempts insurance transactions, reinsurance, and the services of insurance intermediaries acting in that capacity.²

The mechanical reason is that VAT works through a chain of credits: businesses charge VAT on their sales and reclaim it on their purchases. Insurance doesn’t fit that model cleanly, because pinning down the “value added” at each stage of an insurance contract is difficult. Exempting insurance sidesteps that problem.

One thing to know: exempt is not the same as zero-rated. A zero-rated supply is taxed at 0% but the supplier can still reclaim the VAT it paid on its own costs. An exempt supply means the insurer neither charges VAT to you nor recovers the VAT it pays on its business expenses. That distinction becomes important below.

Insurance Premium Tax: The Tax You Actually Pay

Because insurance premiums generate no VAT, the government imposes its own dedicated tax on insurance contracts. Insurance Premium Tax was established by the Finance Act 1994, Part III, sections 48 to 74.³ Technically the insurer pays it, but every insurer passes it through to you as part of the total premium.

IPT and VAT are different animals. VAT is a broad consumption tax with input-tax credits running through the supply chain. IPT is a flat percentage on the premium itself, with no credit mechanism for anyone. HMRC states it directly: “Unlike VAT, IPT cannot be recovered.”⁴

How the 12% Adds to Your Premium

The UK operates two IPT rates. The standard rate of 12% covers most general insurance, including car insurance, home insurance, and pet insurance. A higher rate of 20% applies to travel insurance and to insurance sold alongside certain goods, such as extended warranties on electronics or insurance arranged by a vehicle hire company at the counter.⁵ Ordinary motor insurance bought from an insurer or broker is charged at 12%, even though some vehicle-related insurance from hire companies attracts the higher rate.⁶

The tax is calculated on the gross premium before IPT is added. On a base premium of £500, IPT adds £60, bringing the total to £560. On a £1,000 premium, IPT adds £120. Both rates have been unchanged since 1 June 2017, when the standard rate rose from 10% to 12%.⁵

Most insurers itemise the IPT amount on the policy schedule or quote. When comparing car insurance quotes, check whether each figure is shown inclusive or exclusive of IPT; a headline price that excludes it will look cheaper than a like-for-like quote until the tax is added back.

The Hidden VAT Buried in Your Premium

The VAT exemption doesn’t make your car insurance entirely free of VAT effects. Because insurers cannot reclaim the VAT they pay on their own business costs — office rent, technology systems, marketing, professional services — that unrecoverable VAT becomes part of their operating expenses. Those expenses feed into the premiums they set.

This embedded VAT is invisible on your policy documents, but it’s real. When Mexico removed insurers’ ability to reclaim input VAT in a recent reform, the industry there estimated premiums would rise by 8% to 10% as a direct result. The UK sector has operated under this restriction since VAT was introduced, so the cost is already baked into every premium.

Charges Around Your Policy That Do Carry VAT

The insurance contract itself is exempt, but not everything connected to it qualifies. HMRC draws the line at services closely related to the underwriting of risk; services that are merely incidental fall outside the exemption and carry standard-rate VAT at 20%.⁴ These include:

Valuation and inspection services, including surveys, motor assessments, and damage appraisals carried out by external experts
Loss adjuster fees, normally standard-rated unless the adjuster holds written authority from the insurer to accept or reject claims on the insurer’s behalf
Services supplied in settlement of a claim: if your insurer arranges a repair directly rather than paying you cash, the repair service itself attracts VAT
Marketing and product design, including market research and advertising, which are explicitly excluded from the exemption

Administrative fees for mid-term policy changes, such as adding a named driver or updating your address, can also attract VAT when the fee is treated as a separate service charge rather than an adjustment to the premium. The treatment varies by insurer, so check the policy documentation.

Broker Fees

Insurance broker fees sit in a grey area. A broker’s services qualify for the VAT exemption only when the broker is acting as an intermediary (connecting you with an insurer) and the services are genuinely insurance-related, such as arranging cover, collecting premiums, or handling claims.⁷ A separate advisory fee for general financial planning, or for work that isn’t directly tied to placing or managing your policy, falls outside the exemption and carries standard-rate VAT.²

1
Better Regulation. Article 135 – Directive 2006/112/EC – Value Added Tax Directive (VAT)
2
Legislation.gov.uk. Value Added Tax Act 1994 Schedule 9
3
GOV.UK. HMRC Internal Manual – IPT03250 – Overview and the Law
4
GOV.UK. Insurance (VAT Notice 701/36)
5
GOV.UK. Insurance Premium Tax Rates
6
GOV.UK. Insurance Premium Tax
7
GOV.UK. HMRC Internal Manual – VATINS5205 – Services of an Insurance Intermediary