[Finance Microscope] Double Education Tax Bill Hits Secondary Financial Sector... Ultimately a Boomerang for Consumers

Education tax rate raised to 1% for the first time in 45 years
Insurance companies face KRW 350 billion in extra costs
Card companies and savings banks also brace for heavier tax burden
Concerns grow over higher costs being passed on to con

Tensions are rising among secondary financial institutions as the government has announced plans to amend the Education Tax Act, doubling the education tax rate from its current level. These institutions, already facing challenges of improving performance and defending financial soundness, are now confronted with an increased tax burden. Some are concerned that the resulting cost increases will ultimately be passed on to consumers.

An image depicting ChatGPT illustrating the opposition of secondary financial institutions to the government's proposal to raise the education tax. ChatGPT

Education tax rate to rise from 0.5% to 1%... Insurers to bear an additional KRW 350 billion

According to the financial sector on August 20, the Ministry of Economy and Finance recently announced the "2025 Tax Reform Plan," which includes raising the education tax rate applied to financial companies' operating revenue exceeding KRW 1 trillion from the current 0.5% to 1%. Operating revenue includes interest, dividends, fees, guarantee fees, gains from the sale of securities, insurance premiums, and more-essentially equivalent to sales in the manufacturing sector. The education tax is collected to expand educational facilities and improve teachers' working conditions. For the financial and insurance industries, the education tax has been imposed in lieu of value-added tax exemption. This is the first adjustment to the education tax rate in 45 years since its introduction in 1981.

Among insurers, the six major life insurance companies (Samsung, Hanwha, Kyobo, NH NongHyup, Shinhan, and KB) and the five major non-life insurers (Samsung, Hyundai, DB, KB, and Meritz) each have operating revenue exceeding KRW 1 trillion. It is estimated that, once the amendment is implemented, these insurers will face an additional burden of KRW 350 billion. Compared to other financial companies, insurers pay a relatively larger amount in education taxes, as the proportion of operating revenue subject to the tax-such as insurance premium income and financial investment returns-is higher.

The insurance industry believes that an increase in the education tax will significantly impact their financial soundness. On August 14, the last day of the legislative notice period for the tax reform plan, the General Insurance Association submitted a statement to the Ministry of Economy and Finance outlining these difficulties. There are concerns that if the future education tax burden is immediately reflected in current insurance liabilities, capital will decrease and the risk-based capital ratio (K-ICS) will deteriorate. The Life Insurance Association also conveyed concerns about financial soundness on behalf of its 22 member companies. An industry insider commented, "Insurers face higher corporate taxes than other industries and also bear various quasi-tax expenses such as deposit insurance premiums and supervisory contributions. Raising only the education tax without adjusting value-added tax is unfair," he said.

Insurers' performance worsens... Higher education tax may lead to higher insurance premiums

Insurers have recently been experiencing poor performance. In the first half of this year, the combined net profit of the six major life insurers was KRW 2.6656 trillion, down 4.17% from KRW 2.7816 trillion in the same period last year. The largest declines in net profit were at Hanwha Life (-48%), Kyobo Life (-11.6%), and NH NongHyup Life (-5.6%). Except for Samsung Life, insurance underwriting profits-the core business of insurers-declined. This was due to an increase in loss-making contracts following changes in discount rate and loss ratio assumptions by financial authorities. Some insurers also saw investment profits plummet due to exchange rate fluctuations and other factors.

The performance of non-life insurers was even worse. In the first half of this year, the combined net profit of the five major non-life insurers was KRW 3.8651 trillion, a 19.8% decrease from KRW 4.8206 trillion in the same period last year. The largest declines in net profit were at Hyundai Marine & Fire (-45.9%), Samsung Fire & Marine (-25.3%), DB Insurance (-19.3%), KB Insurance (-3.8%), and Meritz Fire & Marine (-1%). This was due to a series of disasters such as major wildfires and heavy rains, as well as a continued deterioration in automobile insurance loss ratios.

As performance worsens, insurers are responding by raising insurance premiums. This month alone, Samsung Fire & Marine, DB Insurance, Meritz Fire & Marine, and KB Insurance have increased premiums by 5-10% for long-term protection-type insurance by lowering their assumed interest rates. If the education tax burden increases, these and other insurers may further raise premiums. The General Insurance Association also included in its statement to the Ministry of Economy and Finance that higher education taxes would increase the burden on policyholders.

Card companies and savings banks: "Business conditions are already tough... Tax brackets should be subdivided"

Other financial companies in the secondary financial sector are also clearly nervous about the education tax hike. In the card industry, the Credit Finance Association submitted a statement opposing the increase.

Currently, card companies with operating revenue exceeding KRW 1 trillion include Shinhan, Samsung, KB Kookmin, Lotte, Hyundai, and BC Card. If the education tax is raised, these card companies will face an additional tax burden of about KRW 100 billion. The Credit Finance Association pointed out that continued reductions in merchant commission rates have led to declining profits in their core credit sales business, while rising delinquency rates have increased bad debt costs, making business conditions even more challenging.

As an alternative, the association requested that the tax base be changed from operating revenue to profit and that tax brackets be subdivided. The intent is to exclude small merchants and mid-interest loans from the calculation. If this change is made, most card companies' operating revenue would fall below KRW 1 trillion. An industry insider said, "If the current tax base of operating revenue is maintained, the tax amount will continue to increase regardless of profits. With the burden of bad bank contributions and intensifying competition in stablecoins, the industry is already facing a tough environment, and the education tax hike would be an additional burden."

The Korea Federation of Savings Banks also submitted a statement opposing the measure, saying that lending rates for ordinary citizens could rise. In the savings bank sector, OK Savings Bank and SBI Savings Bank are subject to the education tax.

The government plans to submit the amendment to the National Assembly by the end of this month or, at the latest, early next month. If the bill passes, the new education tax will apply to revenue generated next year, with full-scale payments beginning in 2027.