Insurance tax cut could save homeowners and drivers £100s

The government is being urged to cut a tax that is adding almost £100 to car and home insurance policies.

Higher inflation has already put up the cost of cover for drivers and homeowners but there is another charge that the government could help reduce – insurance premium tax (IPT).

The Association of British Insurers (ABI) claims IPT is typically adding almost £100 to the annual cost paid by consumers for motor and combined buildings and contents home insurance policies.

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The trade body is urging chancellor Jeremy Hunt to reduce the rate in next week’s Autumn Statement to help millions of households and businesses manage their rising insurance costs.

What is IPT?

IPT is a tax levied on insurers.

It applies to most general insurance policies including motor, home, pet, and private medical insurance. The standard rate has doubled to 12% since October 2015.

Last year, the tax made £7.45billion for the government, the ABI said.

While insurers pay the tax, in practice it is passed on to customers as it feeds into the amounts charged for policies.

For motor and home insurance alone, IPT typically equates to an added cost approaching £98 per year, the ABI said, made up of £60 for motor insurance and just over £37 for a combined home buildings and contents policy.

IPT also adds around £46.50 to a pet insurance policy and £13.50 to an annual travel insurance policy, typically.

How IPT affects your finances

The ABI said IPT is likely to hit the poorest the hardest who spend proportionately more on insurance, such as home and motor cover.

The costs of some insurance policies have already been surging amid jumps in costs for raw materials, labour and energy. Rising second-hand car prices and the increasing sophistication of cars have also been factors pushing up insurance prices.

The ABI calculated that a single person with a car  - paying motor insurance - who is renting a flat  - paying contents cover - and paying travel insurance could be paying around £87 in IPT.

For a couple with two cars and insurance policies for each, building and contents cover for their own home, pet insurance and two travel policies, the IPT bill could be around £231 annually.

If one person in the couple also has private medical cover, not supplied through work, they could be paying around £500 annually in IPT, the ABI said.

“Insurers are doing all they can to offer competitively priced insurance, despite facing some substantial increases in costs outside of their control,” says Mervyn Skeet, the ABI’s director of general insurance policy.

“Now has never been a better time for the government to show its support to the millions of homeowners and businesses who do the right thing by protecting their families and livelihoods against sudden financial shocks, than to reduce insurance premium tax.”