When George Osborne pledged before the election that he wouldn't raise income tax, national insurance or VAT in the current parliament, it was obvious that he would be looking for more obscure taxes to raise. Hence the Budget saw him hiking a fairly obscure tax that few of us ever think about: insurance premium tax (IPT).
This tax was first introduced in 1994 by Kenneth Clarke to raise money from insurance policies, which are exempt from VAT. It is currently levied at a rate of 6% of the value of the premiums on a range of policies including contents, building, medical and motor insurance and even pet insurance, and raises £1.75bn a year for the Treasury.
But with effect from 1 November, the standard rate will be rising to 9.5% (travel insurance, which is already charged at a higher rate of 20%, will not be increased). While the tax is charged to insurance providers, the cost is passed onto consumers, so we are likely to see premiums rise.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Osborne argues the rate is still far lower than in other countries, such as Germany which has a 19% levy, but the insurance industry is unsurprisingly indignant, calling the hike an "outrageous" stealth tax and "a tax on protection", notes The Sunday Times.
"The government has been working with the industry to reduce the cost of insurance for consumers including a summit chaired by the prime minister," said Steve White, chief executive of the British Insurance Brokers' Association (BIBA). "It therefore seems counterintuitive to be taking measures which will add to the cost effectively taxing protection."
So how big will the impact be? We suspect that any increase will have little to do with the direct impact of the tax itself after all, a 3.5% increase is relatively modest. Instead, we've already seen a number of stories this year showing that insurers are keen to try to raise premiums, after several years of tough competition. For example, the AA said in January that the cost of motor insurance could rise by 10% this year, hiking premiums by £53 on average. An IPT hike gives insurers some cover to try to push these increases through, while blaming it on the government.
That means that it will be even more important to shop around for a good deal this year. We'd always recommend doing this anyway, as insurers don't reward loyalty they offer the best deals to new customers and ratchet up premiums in subsequent years. So make sure you check the major comparison sites such as moneysupermarket.com, confused.com, gocompare.com and comparethemarket.com rather than just filling in the renewal form from your current insurer.
Piper Terrett is a financial journalist and author. Piper graduated from Newnham College, Cambridge, in 1997 and worked for Germaine Greer and for Adam Faith’s Money Channel before embarking on a career in business journalism.
She has worked for most top financial titles, including Investors Chronicle, Shares magazine, Yahoo! Finance and MSN Money. She lectures part-time at London Metropolitan University and is the author of four books.
Nationwide: UK house prices creep up by 0.2% - are we heading for a rebound?
Nationwide’s latest house price index shows property prices inched up by 0.2% as demand warms up - will this trend go into 2024?
By Kalpana Fitzpatrick Published
December 2023 NS&I Premium Bond winners revealed - have you won the jackpot?
Two Premium Bond holders are now millionaires as NS&I reveals December winners. Find out if you’re one of them
By Vaishali Varu Published