Is There VAT on Insurance Payments in South Africa?

Value-added tax (VAT) rules can often be confusing, especially when it comes to complex financial services like insurance. Many South Africans wonder whether they need to pay VAT on their insurance premiums and claims.

This article will provide a clear answer on whether VAT applies to insurance payments in South Africa.

VAT on Insurance Premiums

Now, do South Africans need to pay VAT on their insurance premiums? The short answer is yes. All insurance policies taken out by both individuals and companies in South Africa are subject to the standard 15% VAT rate. This applies to premiums paid on policies like:

• Car, home, and contents insurance
• Business and commercial insurance 
• Health insurance
• Life insurance and income protection policies

So no matter what type of insurance you take out from an insurance company, your premiums will include 15% VAT that must be paid to SARS.

What About Insurance Claims and Payouts?

Since VAT is charged on insurance premiums, many wonder if tax also applies to insurance claims or benefit payouts.

The general rule is that approved insurance claims and policy benefit payments made by registered insurers are exempt from VAT. So if you successfully claim on your policy, you do not pay any VAT on the settlement amount or benefits you receive.

There are a couple exceptions in specific cases:

• If you receive a cash pay-out instead of a repair or replacement, you may need to pay VAT
• Some commercial policy claims may have VAT applied

But in most cases for standard insurance products, successful claims are VAT-free. The tax was already handled when the premiums were paid.

Why Charge VAT on Insurance?

If you have ever dealt with an insurance claim, you’ll know just how frustrating and difficult the process can be. So why does SARS also charge 15% VAT on top of expensive premiums?

There are a couple reasons VAT applies:

• Insurance is seen as a financial service provided by registered companies, similar to banking and investments. VAT applies to most financial services.
• VAT makes insurance affordable by allowing policyholders to claim back the tax amount. Registered VAT vendors can claim back VAT paid on business insurance expenses.
• The tax provides important revenue for South Africa and collected VAT gets distributed back into society through government spending on infrastructure, education, healthcare, and public services. This spending benefits communities across the country over time. 

So while paying VAT on top premiums increases costs for policyholders, much of the tax amount does get circulated back into public spending that aims to benefit society.

Is Insurance More Expensive in South Africa Due to VAT?

Over the past several years, insurance premiums in South Africa have increased sharply across most product categories. Policyholders now pay higher premiums for less generous benefits and rising deductibles.

VAT certainly contributes to the high costs around insurance. But it is not the main driver of expensive premiums in South Africa currently.

Some key reasons insurance is becoming less affordable include: 

• High crime levels leading to larger claims
• Insurance fraud costing providers over R14 billion per year
• Reduced competition in the market
• Poor economic growth over the past decade putting financial strain on providers

Insurers are also trying to improve profitability in the face of rising input costs. While VAT does raise costs, issues like excessive claims and inefficient operations play a larger role in rising premiums for South African consumers. 

You might be interested to know how to calculate VAT in South Africa.

Is VAT Applied When Changing Insurance Policies?

A final common question is whether VAT applies when changing an insurance policy mid-term. For example, if you upgrade or change vehicles and need to update your car insurance.

Much like when taking out a new policy, any additional premiums you pay if adjusting your coverage will include 15% VAT. This also applies when adding new insured items to a policy like jewelry and electronics.

Conclusion

All standard insurance policies sold in South Africa are subject to 15% VAT by SARS, including premiums paid by both businesses and individuals. While approved claims from insurers are VAT-free in most cases, policyholders do pay the tax when taking out cover initially.

So while VAT certainly contributes to high costs around insurance, other inefficiencies in the local market also make policies less affordable. When shopping for cover, South Africans can compare options to find more competitive premiums and make claims when policy benefits apply to offset VAT amounts over time. You can use our free VAT calculator to get rid of any difficulties you might have in estimating your VAT.

FAQs

Do I Pay VAT When Taking Out Life Insurance?

Yes, the standard 15% VAT rate applies to all life insurance premiums in South Africa, including funeral policies, endowments, and income protection cover. The tax is included in monthly or annual premium costs. 

What About VAT On Short-Term Insurance Vs Long-Term Cover? 

There is no difference – all general, vehicle, home, and commercial insurance premiums (considered short-term products) include 15% VAT. The same 15% rate also applies to long-term insurance like life, disability and critical illness cover.

Is Insurance VAT Claimable?

If you pay premiums on a business insurance policy, you can claim back the 15% VAT amount if you are a registered VAT vendor. Most companies deduct VAT as input tax from overall VAT collected to benefit from this. But personal insurance and products taken out by individuals do not allow claiming back VAT.

Do Insurance Companies Charge VAT On Interest On Claims?

If an insurer delays a claim settlement past the agreed payment period, they may be required to pay interest on the benefit amount owed. Any interest paid to the policyholder as a result of late claims processing is exempt from VAT. No tax applies. 

Does VAT Apply On Insurance Sold In Other African Countries? 

VAT rules differ across Africa. While standard rate VAT (15% or higher) applies to insurance premiums in many countries like Kenya, Nigeria and Ghana, others do not charge VAT at all. Countries like Mauritius, Botswana and Zimbabwe have no VAT charges on insurance cover purchased locally. Each country sets their own regulations.