Fiona Murphy discusses how the shock increase to insurance premium tax contained in the Summer Budget will affect private medical insurance policies
The Chancellor's announcement that insurance premium tax (IPT) will increase has sent shockwaves through the private medical insurance (PMI) industry. On 8 July, George Osborne revealed that IPT would increase from its current rate of 6% to 9.5% by November – a rise of 58%.
He said: "Britain's insurance premium tax is well below tax rates in many other countries. I am therefore today raising insurance premium tax – which applies to only one fifth of all premiums – to 9.5%, effective from this November."
When IPT was first introduced, it was set at a flat rate of 2.5%. But it was increased to 4% in 1997, 5% in 1999 and 6% in January 2011.
Imposing a higher cost is a retrograde measure that will do nothing to encourage individuals and employers to protect their health and wellbeing
In other countries, average IPT levels have been about 10%, although taxation on healthcare insurance policies in some countries is treated differently, Jelf Employee Benefits pointed out in a statement on the changes.
IPT applies to PMI, which is classed as a general insurance product and does not apply to life insurance, critical illness and income protection. But how much are premiums expected to increase by?
Discussing the corporate market, Naomi Saragoussi, health and protection lead at PwC, said: "The average PMI premium is about £550, while medical inflation for corporate schemes is about 4% a year compared to the small company market, which can attract increases of between 10% and 12%. This will result in private medical premiums increasing by between 7.5% and 15.5% a year.
"It will also impact employees' taxable benefit, as IPT is included in an employee's overall P11D liability. An employee earning £20,000 a year may find they face an increase in their P11D liability of between £9 and £18 a year – an increase from £110 to £127 a year.
"An increase in premiums due to an increase in IPT may result in some individuals and companies unable to afford private medical cover, increasing pressure on the NHS.
"The increase will have a significant impact on flexible benefit schemes where rates will either have to change mid-year or companies will have to finance the increase until the next renewal."
Premiums will increase dramatically. But with rising medical inflation, PMI has been considered an expensive product in recent years. The number of those with PMI cover has been continually declining year-on-year among UK consumers due to rising premiums, reduced confidence and access to NHS services.
Meanwhile, The Private Healthcare UK Self Pay Market Study 2015 showed that the London self-pay market is estimated to be growing at 20% annually, largely driven by inbound international business – at the expense of PMI.
Brian Walters, principal of Regency Health, described the move as "deeply frustrating that PMI has got caught up in this sharp increase in IPT".
"The Chancellor's rationale was that insurance premiums have come down in recent years so the market can tolerate the increase. This does not apply to PMI, of course, where rampant medical inflation results in ever-increasing premiums.
"Medical insurance is already pushing the bounds of affordability for many people, and this increase in IPT may prove to be a tipping point for older people in particular.
"If we do see a significant contraction in the number of people covered by PMI, it will increase the burden on the NHS, making the IPT increase counter-productive for the Treasury where PMI is concerned.
"PMI is unique in falling between the two stools of general and long-term insurance, given that it is an annually renewable contract with long-term underwriting. In an ideal world, this would be reflected in its tax treatment with another tier of IPT at a more reasonable level (say, 5%).
"But a tax break for private health would be too politically charged for even a Conservative government to countenance."
Chris Horlick, distribution director for AXA PPP Healthcare, said: "The increase in IPT is also unwelcome for individual subscribers and, again, we will be working closely with their advisers to safeguard their healthcare cover.
"While we fully appreciate the need to balance the country's books, imposing a higher cost is a retrograde measure that will do nothing to encourage individuals and employers to protect their health and wellbeing."
Soraya Chamberlain, head of healthcare consulting at PSHPC, said the move "will doubtless significantly reduce the number of employers offering their staff PMI".
Horlick agreed: "It will potentially make the provision of PMI less affordable to many larger employers – at a time when many such employers need their people to be healthier, more engaged and productive than ever, and when pressures on the NHS are increasing.
"Increasing the rate of IPT potentially makes this business-critical health tool less affordable to many SME employers, with a consequent impact on productivity, profitability and, ultimately, an increased burden for care that the NHS may be asked to pick up."
But Chamberlain said: "At first glance, the move seems to be at odds with the government's own long-term progressive stance to work with employers to improve workplace wellbeing, and puts additional strain on an already overstretched NHS. I believe this step will help to hasten innovation in the market."
Chamberlain added that she expected insurers to develop products to fill the gap in response to the IPT increase.
Following the announcement, a number of firms have suggested that large firms look more closely at other healthcare benefits for their staff, such as healthcare trusts or corporate level-deductible (or excess), which are tax-efficient mechanisms.
Horlick said: "Healthcare trusts need not be intimidating to employers or their advisers. They are relatively straightforward to establish and we welcome the opportunity to work with all employers and their advisers in this area when seeking to make medical benefit provision more sustainable in the medium term.
"SMEs are the backbone of Britain's economic recovery and increased prosperity in the years ahead. Medical insurance is a valuable tool to many SMEs seeking to recruit and retain the very best talent in their sector and then keep them fit, healthy, engaged and in the workplace."
Matthew Judge, technical director at Jelf Employee Benefits, said: "The message we want to convey is that it is important to act now. There are a number of options available for employers to reduce the IPT burden; some of them may sound complicated because it might be a different way of working. But they are not and, of course, we're here to help."
Absorbing future shocks
What will the future hold? In recent years, the government has tried to incentivise tackling sickness absence, particularly in the workplace with the introduction of the Fit for Work service. The increase in IPT and not having PMI exempt to this change to encourage wellbeing does seem at odds with this commitment.
Chamberlain concluded: "It is clear that UK PMI is very heavily taxed when you consider personal tax, employers' National Insurance, and now increased IPT.
"However, at this time the government does not see growth of the PMI sector as a core objective and therefore I don't expect to see any likely tax breaks for PMI in the foreseeable future.
"The billions of pounds that will be raised by increasing IPT will be generated mainly through the commercial insurance worlds, such as household and motor insurance.
"Clearly, the increase in the tax is bad news for the PMI industry, but I do not see the increase as an 'attack' on medical insurance – more as an unintended consequence of medical insurance being classed as a general insurance."
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