Insurance premium tax rise set to increase policy costs


Households are facing further increases in the cost of their insurance as a tax rate affecting millions of policies is increased this weekend.

The standard rate of insurance premium tax (IPT), which applies to most general insurance policies bought in the UK, increases from 9.5% to 10% on Saturday.

The hike is expected to push up the cost of new policies bought by a wide range of insurance customers, including those buying home insurance, motorists, private medical insurance customers and pet owners.

It is the second increase to the tax rate in less than a year - and some in the industry have warned it could lead to a spike in uninsured driving, particularly among younger motorists who already tend to pay more for their cover.

The tax increase was unveiled by the Government in the Budget earlier this year, and it follows a previous rise from 6% to 9.5%, which came into effect on November 1 2015.

The Government has said the latest IPT increase will help fund new flood defences and maintain existing ones.

According to calculations by the Association of British Insurers (ABI), the impact of both recent increases to the tax will add more than £16 to the average comprehensive motor insurance policy; more than £12.50 to the average combined building and contents policy; more than £12 to the average pet insurance policy and over £52.50 to the average private medical insurance policy.

In the second quarter of 2016, the average comprehensive motor insurance premium was £434, up 10% on the same period a year earlier, according to the ABI's figures.

The ABI said that because IPT is a tax the Government applies to individual policies, people who have the highest insurance costs - such as young drivers or those with ongoing medical conditions - attract the highest amounts of tax.

Businesses are also affected when they buy cover for their premises, vehicles and to guard against issues such as business interruption.

ABI director general Huw Evans said: "Insuring your home or business, your health and your possessions is the wise thing to do, taking responsibility for protecting yourself from some of the unexpected events in life. Insuring your car is a legal requirement.

"These two IPT increases are a raid on the responsible, taking advantage of those who already do the most to avoid becoming a burden on the state.

"The Government should be in no doubt that such steep increases in insurance premium tax may eat into the finances of both households and businesses."

The AA has warned that young drivers and those living in London will see a particular burden on their premiums as a result of the latest hike.

Mike Lloyd, insurance director at the AA, has said IPT should now be "left alone" by the Government.

He said previously: "IPT has increased by 66.6% in less than a year. It's a tax that is collected by insurance companies on behalf of the Government and this is an extreme hike by any measure."

Mr Lloyd said the tax is "painful to drivers, who will have little option but to pay up. But for some it could be the last straw and lead to a further increase in uninsured driving, especially among young drivers who pay the most for their cover and thus pay more IPT.

"Our message is clear. Any hike in insurance premium tax will lead to spikes in uninsured driving."