Budget 2016: Insurance Premium Tax threatens the support Mutual and Not-for-Profit Insurers can give to the NHS

Budget 2016: Insurance Premium Tax increase threatens support for the NHS

This note covers recent correspondence to the Chancellor, as well as a note to the All-Party Group for Mutuals on the impact of Insurance Premium Tax increases on mutual healthcare.


Rt Hon George Osborne MP
Chancellor of the Exchequer

29 February 2016


Dear Mr. Osborne,

Budget 2016: Insurance Premium Tax threatens the support Mutual and Not-for-Profit Insurers can give to the NHS

The Association of Financial Mutuals represents mutual insurers and friendly societies in the UK, who collectively manage the savings, pensions, protection and healthcare needs of over 30 million people in the UK, and employ 30,000 staff.  Treasury recognises the importance of maintaining a viable mutual sector in UK financial services, in part to improve competitiveness on behalf of the customer, and we value significantly the recent support we have enjoyed through work on the Mutuals’Deferred Shares Act.

I am writing ahead of this year’s Budget to highlight the impact that the recent increase in Insurance Premium Tax has had on our members providing healthcare products that compliment the services of the NHS.  The rise in IPT was the single largest revenue raising element of the last Budget, and the Association of British Insurers (ABI) has estimated that in total it has increased insurance bills by £100 a year for many households.

The Economic Secretary to the Treasury recently wrote to a constituency MP, in response to a letter raising concerns expressed by one of our members, Sovereign Health Care.  In her note, the Economic Secretary indicated that “IPT is a tax on insurers, not their customers”.  But ABI’s evidence demonstrates that insurers are passing on the extra cost, where possible, to their customers suggesting that the tax is not producing the desired effect.  This is particularly the case for quasi-compulsory insurances, such as motor or household cover, where it is easier to pass on higher costs to the consumer.

For non-for-profit and mutual insurers that offer healthcare products however, these extra costs are being largely borne by the insurer.  This is because demand for these products is not so elastic, and consumers and employers are resistant to price rises.  The not-for-profit nature of these providers means- as their name suggests- they are not well-placed to absorb this cost, so the recent increase in the tax has eroded their ability to continue to commit significant resources to community and charitable investments, as well as to threaten their future viability.

For health cash plans, the main benefits of the product are optical and dental treatment; in other words, they help people lead a healthy life, and as a result they do not conform to the traditional nature of insurance, which is designed to pay out in the event of a loss or illness.  These providers do though save the NHS £100s millions every year by early treatment and prevention.  So the threat to health cash plan providers via the imposition of IPT is also a threat of higher costs for the NHS. 

We support the ABI’s position, that any further increase in IPT will ‘hit millions of people trying to do the right thing’.  Whilst Treasury has stated that the UK rate of IPT is lower in the UK than in many countries, this is largely not the case – most countries in the EU do not impose IPT.  Hence, as well as suggesting a freeze in the rate for quasi-compulsory products, we ask that health cash plans in particular are exempted from the tax altogether.  This can be achieved either by an exemption, or by reclassification of the product as non-insurance. 

I very much hope that the Government feels able to support our sector, and we would be delighted to develop these, and other, ideas further with Treasury colleagues.


Yours sincerely,

Martin Shaw

Chief Executive

cc Harriet Baldwin MP, Economic Secretary to the Treasury

Impact of the increase in Insurance Premium Tax on Health Cash Plans

Prepared by AFM for Gareth Thomas MP, Chair of the All Party Political Group for Mutuals

During the APPG for Mutuals meeting on 15 December, the chairman asked AFM to prepare a background note to highlight the impact of the increase in Insurance Premium Tax on Health Cash Plans.

The NHS is a key political issue today and will remain so for the future, with the costs of providing a comprehensive, world class service ever increasing.  As insurers know all too well, whilst life expectancy has increased dramatically in recent decades, so too has the prevalence of illness, meaning that the cost of delivering healthcare is escalating at a dizzying pace.  And of course when people are of work ill, the cost of welfare also increases and productivity falls.

Insurers provide an important role in helping to bridge the affordability gap, by taking some of the pressure off the state.  A wide range of AFM members are involved in providing income protection policies to replace wages when someone is off work sick, or medical insurance to provide early treatment, or health cash plans, to pay for dental and optical care and a wide range of ailments.  This is very consistent with the role that mutuals performed in the days before the Welfare State and the NHS.

Healthcare products provided by mutuals save the NHS many £ millions every year, by funding treatment.  They also have an increasingly important role in rehabilitation that gets people back to work sooner, and in education and other aspects of living more healthily.

During the July Budget, the Chancellor raised the cost of Insurance Premium Tax by 58% (from 6% to 9.5%).  The main focus was on home and vehicle cover and other quasi-compulsory insurances where insurers have readily passed on the higher costs to customers.

But there has been a significant consequence on mutuals, and in particular health cash plan providers.  These policies generally have very low prices: often starting at a pound or two a week.  They can be purchased by individuals to help manage healthcare costs, but they are also popular with small businesses where they are seen as a very valuable way of providing support to the workforce and in improving morale and staff retention. 

Martin Lewis’s Moneysavingexpert website states that “used correctly healthcare cash plans allow you to recover these costs and can pay you back up to six times what you spend on them each year”.  Health cash plan providers are specifically established on a not-for-profit basis, and their profits are ploughed back into the communities they serve via significant charitable donations.

All this does mean that it is a very cost sensitive product, and demand from consumers is price inelastic.  So these small providers have found themselves having to foot large bills for extra tax: they are reluctant to pass the costs onto policyholders and small businesses, and therefore they face a real threat to their survival and to the charitable donations that are such a significant feature of the market. 

The sector itself predicts that the total tax take from cash plans will reduce as a result of the higher rate, both because volumes of sales will fall but also because companies that buy these products will shield remaining policies via trusts.

Possible solutions

1. We’ve seen some local MPs write to the chancellor already suggesting health cash plans should be exempted from IPT; some competitor products are exempt and have a real price advantage now. 

2.  An alternative solution would be to reclassify the product, so that it is no longer treated as a medical insurance policy: which in the traditional sense of insurance a health cash plan is not, as you do not have to be ill to claim (you might merely have been to the dentists or opticians for a check up to receive a payment).


As we suggest above, the impact of removing health cash plans for IPT is likely to be cost neutral for the exchequer.

But for consumers and small businesses the benefits of making the product more competitive is that many more people will take action to manage their future health needs better, relieving many £millions of cost from the NHS and from welfare benefits.  Equally, these changes will secure the large contributions made by the sector to charities.

AFM is undertaking further work to demonstrate the healthcare savings provided by the sector.


It would be very helpful to our case if members of the All Party Political Group for Mutuals were able to contact the Chancellor to ask him to review the decision to impose Insurance Premium Tax on health cash plans.

For more information, please contact Martin Shaw, Chief Executive, Association of Financial Mutuals ([email protected]; 0788 754 7195)


About AFM

The Association of Financial Mutuals (AFM) represents insurance and healthcare providers that are owned by their customers, or to serve a defined community (on a not for profit basis).  Between them, mutual insurers manage the savings, pensions, protection and healthcare needs of over 30 million people in the UK and Ireland, collect annual premium income of £16.4 billion, and employ nearly 30,000 staff[1]


The nature of their ownership and the consequently lower prices, higher returns or better service that typically results, make mutuals accessible and attractive to consumers, and have been recognised by Parliament as worthy of continued support and promotion.  In particular, FCA and PRA are required to analyse whether new rules impose any significantly different consequences for mutual businesses.


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