The UK Chancellor’s budget will directly increase the costs of providing employee benefits, said Mercer
The proposed hike in Insurance Premium Tax (IPT) in Chancellor George Osborne’s budget will land companies with higher costs for the provision of healthcare benefits, according to experts.
In line with the increase in the VAT rate, the higher rate of Insurance Premium Tax (IPT) will increase on 4 January 2011, from 17.5 per cent to 20 per cent and the standard rate will increase from 5 per cent to 6 per cent.
IPT is incurred on the premiums paid by employers for their company private medical insurance. The Chancellor announced in the Budget that the standard IPT rate will increase to 6% and the higher rate to 20%
Chris Bailey, Senior Consultant in Mercer’s Health & Benefits business commented: “This will directly escalate the cost of providing benefits and unlike VAT it is not possible to reclaim. With leading insurance providers generally quoting medical insurance inflation at an average of 7 - 8%, the additional cost of an increase in IPT is likely to leave employers with a significant hike in premium costs - above the levels they will have budgeted for.”
There are steps employers can take to alleviate increases in costs, for example, by providing benefits through tax-efficient vehicles such as medical benefit trusts, said Mercer. As a trust-based benefit is not classified as insurance, IPT is not applicable to the funds placed in trust.
Bailey said: “Medical benefit trusts are fundamentally different from purchasing a contract of insurance, but they do not need to be onerous for the employer and, if set up correctly, can permit companies to contain the key cost drivers behind medical inflation. The increase in IPT is a very strong argument for organisations in the UK to review their arrangements.”
NB: The calculation is based on a scheme of 500 employee members with the average cost per person covered of approximately £440 including IPT (at the current 5% rate). If IPT increases to 10%, the average cost moves to £460.95. With the same calculation then repeated for a scheme of 10,000 members (with an average cost per person currently of £425), an organisation currently paying £200k for PMI would be charged an additional £10k, whilst companies paying £500k would see approximately a £25k IPT increase.
Budget measures: At a glance
Public sector pay freeze
Child benefit frozen
Housing benefit cuts
Disability Living Allowance cuts
Tax cut for lowest paid
Two year council tax freeze
Capital Gains Tax increased
NI tax holiday for job creation outside South-East of England