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Car Insurance premium tax to rise

Published: 30/06/2010 by Comments

The Chancellor of the coalition government has announced a significant raise in insurance premium tax (IPT), much to the indignation of the insurance industry. The move is a part of the government’s attempts to cut down on the gaping budget deficits by raising around £2.3 billion a year in new taxes.

The new budget will see the tax rates for customers of general insurance products, such as home or car insurance, rise from 5% to 6% by 4 January, 2011. Motorists will be especially hard hit by this move, having already seen their car insurance bill rise significantly over the last 12 months.

Customers buying travel insurance, and used car and electronic goods, will be facing an increased IPT of 20%, up from the previous 17.5%. Tax on insurance policies for gas-based central heating will also see an equivalent rise to 20%.

Although general consensus in the industry is that new tax raise will hurt, opinion seems to be divided as to the extent of the damage. Some have heavily criticized the move, while others say it is not as bad as it could have been. Initially, there were fears that the government might as much as double the general insurance tax rate to 10%.

Kerrie Kelly, the general director of the Association of British Insurers (ABI), warned that the decision will have a direct impact for a majority of the families that seeks to protect themselves sensibly. This might lead to consumers seeking such protection, which would be disastrous on the long run, she added.

Chief executive of the British Insurance Brokers’ Association (Biba) Eric Galbraith, expressed his disappointment at the government’s decision to increase tax on “the prudent - those who buy insurance.” With consumers already cutting down on insurance protection in a recession-hit economy, “the last thing people need is a higher insurance bill” he said.

On a brighter note, Simon Douglas, director of AA Insurance, publisher of the influential quarterly British Insurance Premium Index, said that although the raise is not good news for people buying home and car insurance, it is less painful than it could have been. “I am relieved that the increase wasn’t any greater than that and it shows that the chancellor has been listening to our concerns” he commented.

However, he expected car insurance premiums to rise to up to 20% this year, with providers facing some serious financial pressures. If such a rise does occur, it will only compound the woes of the British motorists who have faced a similar rise the year before as well.

The IPT was originally introduced in 1994, pegged to a flat rate of 2.5%. In 1997, the tax rate for general insurance products were raised to 4%, and a second higher band of 17.5% was introduced to cover travel, motor and electronic policies. Two years later, the general insurance tax was further raised to 5%.

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