VAT and car insurance

When looking at car insurance costs, many people ask how VAT applies. Car insurance does not follow the same VAT rules as most services.

In the UK, car insurance premiums are not usually subject to VAT. Instead, a different type of tax applies, known as Insurance Premium Tax.

Understanding the difference can make policy costs easier to understand.

Is there VAT on car insurance?

No, VAT is not charged on the insurance premium itself. UK insurance premiums are generally exempt from VAT, so you should not see VAT added to the cost of cover in the way you might with other purchases.

That does not mean there is no tax involved. Most motor insurance includes Insurance Premium Tax, which is built into the price.

What is Insurance Premium Tax and why does it apply?

Insurance Premium Tax, often shortened to IPT, is the tax that applies to many non-life insurance policies, including motor insurance.

It plays a similar role to VAT in the sense that it is a tax on the purchase, but it is specific to insurance.

A few practical points are worth knowing:

• IPT is usually included in the total price you are quoted
• The insurer collects it and passes it on to HMRC
• It is not VAT, so it is not something you can “add” or “remove” in the same way

People are often unaware of IPT as it is not always shown as a separate line item.

Why can fees have VAT when the premium does not?

The premium is one thing, and extra policy charges are another. While the premium itself is not subject to VAT, some additional fees can be.

Examples include:

• Administration fees
• Cancellation fees
• Charges for making changes mid-policy

These charges are often treated as services linked to running the policy, which means VAT may apply. Your insurer should show this clearly on your paperwork.

Find out what fees may apply at Marshmallow.

VAT and car insurance for businesses

The same general rule applies whether you are insuring a personal car or arranging business car insurance. The insurance premium is still usually exempt from VAT, and IPT still applies.

It is also worth being clear on one point that causes confusion. IPT is not VAT, so VAT-registered businesses cannot reclaim IPT. If VAT is charged on an admin fee, reclaiming it depends on normal VAT rules and how the vehicle is used.

Key takeaways

• Car insurance premiums are not subject to VAT in the UK
• Insurance Premium Tax is normally included in the quoted price
• Some policy fees may have VAT, separate from the premium
• IPT is not VAT and cannot be reclaimed as VAT

Get a quote today to see what you could save with low-cost car insurance.