Fears of 30% insurance price hike after Budget tax jump

SPECULATION is mounting that the government may increase insurance tax in the forthcoming Budget in a move that could send the cost of motor and home insurance soaring by up to 30 per cent.

The Treasury is believed to be considering hiking insurance premium tax (IPT) in the 22 June emergency Budget as part of its deficit-cutting plans.

The 5 per cent tax is applied on general insurance premiums including motor, home and pet cover. It does not cover life, travel or extended warranty protection, which are taxed at 17.5 per cent.

Doubling the tax could produce about 2.3 billion of tax for the Treasury, while aligning IPT with the 17.5 per cent rate would generate an estimated 8bn.

A spokesman for the Association of British Insurers argued that a rise in IPT would be "not be in anyone's interest".

He said: "It is a tax on people being sensible and taking action to protect themselves. Raising IPT could mean more people not renewing or taking out insurance, which could impact on the public purse if something happens, such as widespread flooding."

The British Insurance Brokers' Association (Biba) claimed that increasing IPT would add to the financial pressure on individuals and businesses.

Eric Galbraith, chief executive of Biba, said: "Our research last year demonstrated that businesses and consumers were reducing insurance cover as a result of the recession and we are concerned that increases to insurance premiums as a result of IPT could lead to even further under-insurance or even a lack of insurance protection."

The cost of car and home insurance cover is already on the rise. The Office for National Statistics last month said annual car insurance premiums had risen 26.1 per cent over the past year, while home insurance premiums have risen gradually over the past year, partly due to a number of serious localised floods.

The average premium for comprehensive car insurance was 612 at the end of March, up 22.5 per cent over the year, according to the latest AA British Insurance Premium Index.

That premium includes IPT of 29.14, at 5 per cent. If the tax is doubled to 10 per cent, as many experts predict, the premium would increase to 641.14, while increasing it to the current VAT rate, 17.5 per cent, would send the cost to 703.51.

Ian Crowder, spokesman for the AA, said that car insurance premiums could rise sharply even without an increase in tax.

"A significant jump in IPT could boost premiums by up to 30 per cent over the coming year," said Crowder.

A spokesman for RBS Insurance said: "One of the worrying effects of this may be an increase in the number of uninsured drivers on our roads and the threat to the safety of other drivers and pedestrians."