07-04-2016

Since before the Budget 2016 announcement, there were murmurs that the Chancellor of the Exchequer, George Osborne, may be ’planning’ a rise in insurance tax. Then on 16th March 2016, the industry’s fear became a reality.

An insurance premium tax (IPT) increase has been announced. This will raise the current figure of 9.5% to 10% as of 1st October 2016, affecting insurance policies on cars, households, pets and any private medical cover.

This is the second increase in just a few months, after tax was increased from 6% to 9.5% in November as a result of the Summer Budget 2015. And this new figure means insurance buyers will see an increase of 66.6% year-on-year since March 2015.

Previous comments from the Association of British Insurers (ABI) stated that any further rises would be a ’raid’ on ’responsible consumers’ and it may result in a decrease in the number of policies being taken out.

So, why is the government increasing IPT? It stated that the capital raised will help fund new flood defences and maintain existing ones which, in theory, would prevent policy holders needing to make a claim and causing their premiums to increase.

The British Insurance Brokers’ Association (Biba) is ’astonished’ at the increase and its Chief Executive, Steve White, has been reported as saying:

"Whilst we support the additional spending on flood defences we believe that this could have been funded by the projected £1.5 billion annual funds paid to the exchequer as a result in the increase in IPT put in place only last November, which puts an increased burden on policyholders, many of whom are suffering from ongoing flood damage"

What Does this Mean for Insurance Policy Holders?

Budget documents claim that when insurance providers pass on the increased costs to their customers, this 0.5% increase will equal an extra £1 per year on the average combined home and contents insurance and £2 on annual motor insurance premiums.

According to ABI, when IPT rates were hiked back in November 2015 many families found their typical insurance bills around £100 higher. And these new changes could mean that the average young driver could be liable to pay an extra £50 when taking out an insurance policy, compared to the previous 6% rate.

The effect will be felt most by people who pay the highest insurance premiums. Therefore, younger and older drivers, inner city or flood risk homes, and anyone with an ongoing medical condition are likely to feel the punch.

RAC Insurance Director, Mark Godfrey, has said: "The Chancellor clearly sees IPT as a soft target."

"What makes this latest IPT rise a particularly bitter pill for the insurance industry to swallow, alongside the implementation costs, is the fact that we are yet to see any of the insurance premium reductions mooted in the Chancellor’s Autumn Statement from new initiatives aimed at cutting compensation claims for soft tissue injuries in the small claims courts. In fact the cost of insurance is rising, in part due to his previous IPT rise."

Could insurance premium tax increase further? Well, the AA fear it may eventually rise to as a high as 12.5% - so watch this space.

In the meantime, if you are looking for affordable business insurance, whether motor, trade or professional, we can help. Compare quotes from the UK’s leading providers to find the best price for you by selecting the type of insurance you need here.