Insurance premium tax (IPT) is to increase from 4 January 2011.
The standard rate of IPT will rise from 5% to 6%.
IPT applies to private medical insurance and health cash plans. However, other long-term insurances, such as protection benefits will remain exempt from the tax as long as the policy is written on a long-term basis.
Michael Payne, general secretary of the Association of Medical Insurance Intermediaries (Amii), said: "Insurers will probably be breathing a sigh of relief today that it is only an increase to 6%."
Chris Bailey, senior consultant in Mercer’s health and benefits business commented: “[The rise in IPT] will directly escalate the cost of providing benefits and unlike VAT it is not possible to reclaim.
"With leading insurance providers generally quoting medical insurance inflation at an average of 7-8%, the additional cost of an increase in IPT is likely to leave employers with a significant hike in premium costs – above the levels they will have budgeted for.”
There are steps employers can take to alleviate increases in costs – for example, by providing benefits through tax-efficient vehicles such as medical benefit trusts. As a trust-based benefit is not classified as insurance, IPT is not applicable to the funds placed in trust.
Bailey said: “Medical benefit trusts are fundamentally different from purchasing a contract of insurance, but they do not need to be onerous for the employer and, if set up correctly, can permit companies to contain the key cost drivers behind medical inflation. The increase in IPT is a very strong argument for organisations in the UK to review their arrangements”.
Read more on healthcare benefits
