HMRC’s Insurance Premium Tax Now Adds £68 to Every Driver’s Car Cover

• HMRC collected a record £9.04 billion in Insurance Premium Tax across 2025/26, up £157 million on the year before.
• The 12 percent tax is added to almost every UK car insurance policy, adding roughly £68 to the average £566 annual premium.
• Standard rate IPT liabilities, the band that covers motor policies, rose 6 percent to £8.777 billion in the most recent full year on record.

Every time a UK driver pays their car insurance bill, roughly one pound in nine of it goes straight to the Treasury before a single claim is ever paid out. HM Revenue and Customs collected a record £9.04 billion in Insurance Premium Tax across the 2025/26 financial year, according to its own bulletin, up £157 million on the £8.88 billion raised the year before. Car, van, motorcycle and fleet insurance are all taxed at the standard 12 percent rate, a levy that sits on top of the premium itself and is baked into the number a driver sees on their renewal notice.

It is not a tax most drivers have heard of. It never appears as a separate line on a car insurance bill the way VAT does on a shop receipt, and insurers fold it straight into the headline premium, so a driver renewing today has no easy way to see how much of what they are paying is cover and how much is tax. Based on the Association of British Insurers’ Q2 2026 figure of £566 for the average UK car insurance premium, the 12 percent IPT charge works out at roughly £68 a year, money that adds nothing to the cover itself and buys the driver no extra protection at all.

The tax that rises every time your premium does

IPT is charged as a percentage rather than a flat fee, so it climbs automatically whenever premiums do, with no need for the government to announce a change or move the rate. HMRC’s own figures show standard rate IPT liabilities, the band that includes motor insurance alongside home and pet cover, reached £8.777 billion in the most recent complete financial year, up £519 million, or 6 percent, on the year before. Quarterly receipts have kept climbing too: the first quarter of the current financial year, April to June 2026, brought in £2.172 billion, edging past the £2.170 billion collected in the same three months a year earlier, while June 2026 alone raised £52 million, £11 million more than June 2025.

The pattern is consistent. As insurers pushed premiums higher through the second half of 2025 and into 2026, the tax attached to those premiums rose in step with them, with the rate itself left untouched throughout. A driver whose premium climbs from £500 to £600 at renewal is not just paying £100 more for their cover. They are also paying an extra £12 in IPT on top of that £100, with the tax simply tracking whatever figure the insurer settles on, whether or not the driver has made a claim.

That link between premium and tax take also means the roughly £68 a year an average driver hands over is far from the ceiling. A driver in their early twenties, a driver in a high-claims postcode, or a driver of a performance car can easily face a premium two or three times the national average, and the IPT bill scales up in exact proportion to it. A £1,500 premium, not unusual for a driver under 25 in parts of London or Manchester, carries roughly £180 of IPT inside it: nearly three times what the average driver pays under the same 12 percent rate.

IPT was introduced in 1994 at a standard rate of just 2.5 percent. It has been raised repeatedly in the years that followed, reaching 6 percent in 2015, 9.5 percent in 2016, 10 percent in 2017 and 12 percent from June 2017, where it has stood for more than nine years. Industry commentary tracked by the trade press has flagged speculation ahead of recent Budgets about whether the rate could rise again, though no increase to the 12 percent standard rate has been announced or confirmed by the Treasury as this article was published. Any change to the rate itself would need to be confirmed in a Budget statement and would not take effect until the date the government sets, so drivers should treat rate rise speculation as just that unless and until it is confirmed.

The bigger driver of the record IPT haul has not been the rate itself but the premiums it is calculated against. Car insurance prices rose for the first time in two years in the third quarter of 2026 after a lengthy period of falls, and every increase in the average premium feeds directly into a larger tax take, even with the rate unchanged.

Can you avoid it

There is no legal route for an ordinary driver to sidestep Insurance Premium Tax on a standard car policy. It applies to the vast majority of motor insurance written in the UK, and only a small number of specialist categories, such as certain reinsurance arrangements and some insurance for disabled passenger vehicles, fall outside the standard rate. For almost everyone reading this, the tax cannot be declined or removed from a normal policy no matter which insurer is chosen.

What a driver can control is the size of the premium the 12 percent is calculated against. A smaller base premium produces a smaller tax bill in cash terms, with the percentage rate itself staying fixed at 12 for every driver alike. Shopping around at renewal rather than accepting an automatic rollover is the single biggest lever available: insurers are barred from charging existing customers more than an equivalent new customer would pay for the same policy, a rule the Financial Conduct Authority introduced in January 2022 to end so-called price walking, but that rule only holds if a driver actually compares the market rather than letting the renewal go through unchallenged.

Adding a named, experienced second driver, increasing a voluntary excess, or fitting a telematics black box can all reduce the base premium insurers quote, and each of those reductions carries a proportional cut in the IPT charged alongside it. Paying annually rather than by monthly instalments also helps: monthly premium finance typically carries its own separate interest charge on top of the premium and its tax, compounding the total cost rather than reducing it. A driver who pays £600 a year in twelve monthly instalments can end up handing over £60 to £70 more across the year in finance charges alone, on top of the £72 in IPT already built into that premium.

Checking that a vehicle sits in the lowest insurance group it qualifies for, and that any modifications, driving history or address details on file are accurate and current, can also lower the underlying premium HMRC’s 12 percent is calculated against. Multi-car policies, where available, often price each vehicle lower than an equivalent standalone policy would, which again reduces the absolute amount of tax attached to each car on the household’s insurance.

None of these steps make the tax itself go away. What they do is shrink the number it is applied to, which is the only lever available to a driver who cannot otherwise choose whether to pay it. With premiums having started rising again after two years of falls, and speculation over a further rate change resurfacing ahead of each Budget, the gap between what a well-shopped driver pays in IPT and what a driver who never checks the market pays is only likely to widen.

Sources: HM Revenue and Customs, Insurance Premium Tax (IPT) bulletin and commentary, gov.uk, financial year 2025 to 2026 figures and Q1 2026/27 commentary (published July 2026); Association of British Insurers, Q2 2026 average car insurance premium data; Financial Conduct Authority, general insurance pricing practices rules, in force from 1 January 2022.