Motorists to pay extra as a result of ‘stealth’ insurance tax increase
Some 30 million motorists will see their premiums rise by £386 million a year, or £12.80 each, as a result of the increased Insurance Premium Tax (IPT) that comes into effect this weekend.
The tax on insurance premiums is rising by more than half, from 6% to 9.5%, with the average car insurance policy costing £367. Younger drivers will be the worst affected, as the average premium for drivers aged 18-20 is £972 and the tax rise will add £34 to a premium of this size.
IPT is levied on several types of insurance. The RAC, which compiled the figures, say motorists will be hit hard as car insurance accounted for a fifth of the £3 billion tax charged on insurance premiums in 2014.
RAC Insurance director Mark Godfrey said: “Insurance is – rightly – mandatory for anyone getting behind the wheel. The 3.5% hike in IPT is another stealth tax like fuel duty that has unreasonably added to the already considerable contribution made to the Treasury by motorists.
“With insurance premiums currently going up faster than they have in the last five years, it’s sadly going to be a double whammy of bad news for the motorist.
How much tax do motorists pay?
According to the RAC, motorists paid some £39.2 billion in driving-related taxes in 2014. That breaks down as follows.
- Fuel duty: Charged at 57.95p a litre. The total tax take in 2014 was £26.4 billion.
- VAT on fuel: Levied at 20%. Drivers pay £6.3 billion a year.
- Vehicle Excise Duty: Charged based on a vehicle’s CO2 emissions. The tax bill for this was £5.9 billion in 2014.
- Insurance premium tax: Raised £624 million in 2014, and is expected to cost drivers more than a billion after the rate rises to 9.5%
Who else will pay more IPT?
IPT is charged on car insurance, home insurance, pet insurance and private medical insurance. A higher 20% rate is charged on travel insurance and some electrical warranties. This will not change.
Some insurance policies are exempt from IPT, including life insurance, mortgage insurance and spacecraft!
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Private medical insurance
PMI allows you to skip the NHS waiting list and arrange treatment at a time you choose. With most PMI policies, you pay a monthly premium (the older you are, generally the higher premium) and the policy will then pay out, up to specified cover limits and after an agreed excess, for any treatment you might need. Not all conditions are covered by PMI and you get what you pay for: the more cover you want, the higher your premium will be.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).