A tipping point for IPT

Self-funded healthcare would be one of the few beneficiaries of an increase in insurance premium tax, and 10 percent would be a tipping point. Emma Lunn reports

With insurance premium tax (IPT) at a comparatively low rate of 6 percent at the moment, it is widely considered to be low-hanging fruit for chancellor George Osborne when he looks for ways to increase revenues in the next Budget. He has already put IPT up once, from 5 to 6 percent in the emergency budget after the Coalition Goverment came to power in 2010. Few believe it will stay at that lever until the end of the Parliament.

But that 1 per cent increase, though a 20 per cent hike in the amount of tax charged on PMI and therefore a similar increase in potential tax saving by opting for self-insured, has not been enough to move attitudes significantly. A straw poll at the Corporate Adviser industry forum showed that 71 per cent of delegates thought that the 1 per cent increase in IPT last year had “slightly changed” employers’ perceptions of the value of self-insured healthcare. The remaining 29 per cent thought it had made no difference.

For those employers that are remaining with insured healthcare, a further rise in IPT could be the trigger that causes them to seriously consider a self-funded scheme.

IPT is levied on most types of general insurance where the risk is located in the UK. The rate stands at 6 per cent at the moment although some types of insurance such as travel insurance fall into a higher 20 per cent band. Private medical insurance falls into the 6 per cent band meaning £1m of PMI cover actually costs employers an additional £60,000.

Arguably the most significant advantage for employers of a self-insured healthcare scheme is that, not only do they not have to pay an insurance premium upfront, but they don’t have to pay IPT on that insurance premium.

So how much will the tax rate have to rise for clients to want to make the change? Both Mike Izzard, managing director of Premier Choice Group, and Steve Bradley, client director at Lorica Consulting, agreed that a rise to 10 per cent could be a “tipping point” that would prompt a shift in the market.

Izzard said that if IPT went up to 10 per cent it would be very difficult for some medium sized and large corporates not to look at a self-funding option. “10 per cent is a large amount on a large sum of money. It’s not just financial, it focuses the mind: this is 10 per cent, how long will it be before it’s 15 per cent? I think IPT might go up in two stages to 10 per cent at the end of this parliament or the next parliament if there’s not a change in the economic and world financial situation. It’s an area the Government will look at to raise money. If it goes to 10 per cent or more I believe demand for self-funded trusts or PMI schemes will increase markedly.”

The general consensus around the table was that Osborne was unlikely to increase IPT to 10 per cent in one go, and staged increases were more likely. 57 per cent of delegates thought that IPT would have to go up between 2 and 4 per cent before employers’ perceptions of the value of self-insured healthcare were significantly changed. 43 per cent thought that IPT would need to go up between 4 and 6 per cent before the view was markedly altered.

Naomi Saragoussi, principal at Mercer, said: “Whether a 2 per cent rise will make a difference will depend on the claims profile and the client’s approach to risk. IPT is very important but it’s then a matter of saying where do you want to go now and go through the scenarios and look at which one you’re more likely to be happy with. It comes down to client’s profile. Do they have the ready cash to actually fund the trust?”

A rise in IPT is likely to be an emotive issue if and when it happens. Some pundits saw an IPT rise as regressive and punishing to some low income groups who have no choice about whether to buy car insurance, for example.

Karen Gamble, director of health and wellbeing at Health Lambert, said a rise in IPT in the next budget could lead to further differentiations in the way the tax is levied on different classes of insurance.

“Last time in the Budget when IPT was under attack, motor insurers were up in arms. If IPT is going to go up it will hit motor insurance and household insurance – so the whole concept of IPT will come under analysis,” she said. “Europe doesn’t tax medical insurance premiums as it’s a benefit in kind. If higher IPT affects PMI I agree with Mike (about 10 per cent being the tipping point) but I’m not sure it will go that route. I think there will be too much of a political groundswell against it.”

It is possible that if the Government did increase IPT it might differentiate between statutory insurances and non-statutory such as PMI, said delegates. Although the Government will not want more barriers to people obtaining PMI, as this would increase pressure on the NHS, delegates thought it almost a certainty that an IPT increase in some shape or form will happen for healthcare.

Chris Evans, senior consultant at Buck Consultants, said: “I think if the Chancellor’s cute he will put it up 1 per cent a year. Doing it at that level means it’s flying below the radar.

“But if he was really cute he would recognise the PMI market in the UK and put every break in place (for it). I think there could be greater emphasis put on employers to make greater provision for employees, and medical insurance sits right at the heart of that alongside wellness and wellbeing and long-term disability support.”

Izzard pointed out that once firms offer PMI, it’s difficult to stop offering it without causing a big problem. Therefore it is debatable about whether an increase in IPT would stop firms offering health insurance to their staff. But he agreed the state’s healthcare costs would be cut if more employers were incentivised to insure their staff’s health privately.

“There would be less burden on the NHS if companies were incentivised to offer PMI,” he said. “Tax is a disincentive for employers to offer a PMI scheme. It would take some of the pressure off the NHS if employers were rewarded or incentivised, or not penalised, to do PMI.”

If IPT was to rise then it’s possible that smaller firms would become interested in self-funded healthcare. The majority of delegates thought that 500 employees was currently the threshold for self-funded healthcare being a viable option. If the tax burden on PMI increased then it’s likely that threshold could fall.

While advisers welcomed the potential for extending self-funding to smaller employers, some present at the event were concerned at disreputable firms selling self-funded schemes to companies that would have been better advised to stick with insured healthcare. Several delegates cited experiences where some more volatile clients had been advised that self-insurance was a good option for them when they should not have been.

“There’s a danger of small brokers not knowing what they’re doing and some smaller third party administrators giving the industry a bad name,” said Izzard.

Howard Hughes, head of employer marketing at Simplyhealth agreed, saying: “There are some outfits out there that are promoting directly into organisations the idea that healthcare trusts are a solution where quite frankly it’s questionable whether that’s a viable option.”

Whether the Government will increase IPT and how it will affect PMI sales remains to be seen, but for now advisers agree that the potential for such increases is yet another reason why employers should at the very least be informed of the self-insured option. That way, if and when IPT does go up, their understanding of the concept will be that much higher.