INSURANCE PREMIUM tax (IPT) will rise by 1 per cent to 5 per cent in July adding, pounds 3 to the cost of a typical motor contract of pounds 315 and a similar amount on an average home insurance policy of pounds 285.

The Chancellor said this week that the vast majority of insurance products would continue to be exempt from IPT.

However, insurers argued that the tax, which is levied on motor, property, travel and extended warranty policies, would affect every household. One study claimed the increase would mean an extra pounds 10-15 a year in tax.

IPT was introduced in 1994 and pegged at 2.5 per cent. Last year, the Government raised IPT for travel insurance to 17.5 per cent.

A spokesman for Direct Line said: "Unlike VAT, insurance premium tax is not recoverable and, as we have consistently maintained in the past, it is unrealistic to suggest that insurers can absorb the tax."

Teresa Hunter