Insurance premium tax is increased again in autumn statement

Insurers and motoring groups have reacted with fury to the government’s announcement that insurance premium tax (IPT) will rise to 12% from June next year.

The tax, which is added to 50m general insurance policies each year including those for cars, homes and private medical cover, had been described in the runup to the statement by the industry as the UK’s “fastest growing stealth tax”.

Announcing the extra 2% increase, the chancellor, Philip Hammond, said IPT rates in the UK remained some of the lowest in Europe and that money was needed to pay for the government’s infrastructure plans. But the Association of British Insurers (ABI) described the increase as a “hammer blow for the hard-pressed”.

From 1 June 2017, most buyers of insurance policies will see the higher 12% rate added to their premium.

Since IPT was introduced in 1994 at 2.5% it has been steadily increased by successive chancellors. IPT has been hiked three times in the past 18 months: the latest rise – of 0.5%, which took the rate to 10% – came into force just last month, on 1 October. Only as far back as 2010 the rate was just 5%.

Car drivers are likely to feel the worst of the tax hike. Next June’s increase will add around £10 a year to the average car insurance premium, said the AA. Car insurance premiums have been rising steadily – up 16% to an average £586 – as insurers have sought to pass on higher claims costs.

Amanda Blanc, group CEO of one of the UK biggest insurers AXA, said the hike represented an unwarranted attack on millions of people simply looking to protect themselves.

“This is a classic case of the government giving with one hand, in the form of whiplash reforms, and taking with another,” she said. “The affordability of insurance is being fundamentally threatened. The country is already underinsured and ever rising insurance taxation could have the unintended consequence of making this situation even worse.”

The AA said the chancellor had created the illusion of being the motorists’ friend with a freeze on fuel duty, while “pickpocketing drivers” on IPT. Its president, Edmund King, predicted that the extra levy would only add to the 1m uninsured cars on UK roads.

“In 18 months, tax on insurance will have doubled – no other tax has increased by that much,” he said.

IPT was introduced in 1994 to raise revenue from the insurance sector, which was then viewed as being under-taxed. Life insurance, permanent health insurance and all other long-term insurances are exempt. Travel insurance and mechanical breakdown policies are charged 20% IPT, but this remained unchanged in the autumn statement.

Opponents of the tax say it is regressive because it is applied to individual policies – people who have the highest insurance costs pay a disproportionately high rate of IPT.

Young drivers and those living in London – those who pay the highest premiums – will bear the biggest burden, said the AA.