Will your insurance costs soar in the Budget?

Will your insurance costs soar in the Budget?

Policyholders of insurance could see costs increase by 12.5% after the Budget if insurance premium tax is hiked, say experts.

Insurance premium tax applies to all general insurance premiums including home, motor and travel insurance and crucially private medical insurance. It does not apply to life cover.

With motor insurance being compulsory, this could affect millions of Britons.

Currently there are two rates of insurance premium tax: a standard rate of 5% and a higher rate of 17.5%, which applies to travel cover and premiums for some vehicles and domestic appliances.

But there are fears the standard rate is set to rise in Chancellor George Osborne's first Budget next week.

Although the lower rate has remained at 5% for a decade there are rumours that it will rise this month to 10% or even in line with VAT which is currently 17.5%, but expected to increase to 20% in the Budget.

If the chancellor does increase it, anyone with an insurance policy for home contents or buildings, car or health cover will find their costs rise considerably.

Michael Payne, general secretary of the Association of Medical Insurance Intermediaries says: "The danger is that as in a lot of European countries, IPT will be raised to the same level as VAT. So the ballpark figure is it going up to 17.5%."

With an average individual policy costing £1,500 per year, according to data provider Laing Buisson, an increase in insurance premium tax from 5% to 17.5% would cost an additional £187.50.

Private medical insurance is offered to approximately five million Brits through their employer and Payne fears the increase in costs could result in fewer employers offering such a perk.

But Payne is not only concerned about health insurance: "It would be difficult to imagine there not being a more general fallout. The danger is that people will just give up cover. It's going to have ramifications across the insurance sector."

The average cost of a car insurance premium is currently £583 a year, according to the AA’s British Insurance Premium Index. Insurance premium tax charged at 5% adds £29 to the cost of the policy. But if it was charged at 17.5% the policyholder would need to find £102. 

As the cost of insurance - particularly car insurance - is rising every year, there are fears that increased insurance premium tax will make cover too expensive and many people may not be able to afford to renew policies.

The Association of British Insurers confirms that home insurance is one of the first casualties of a recession as families try to cut costs. 

Insurance premium tax is currently worth £2.25 billion to the Treasury so it’s easy to see why it’s been targeted as a money-spinner as the government attempts to address the country’s financial black hole.