Travellers heading off the beaten track this summer face a fourfold rise in travel insurance. Paul Slade reports on a little noticed tax hike

A holiday off the beaten track is a dream for millions of travellers who don't wish to undergo the regimented experience of package trips abroad.

Increasing numbers of holidaymakers achieve that dream. Yet, thanks to a little-noticed measure announced by the Chancellor of the Exchequer, Gordon Brown, in his last Budget, those of us who avoid package tours will face a fourfold rise in tax on our travel insurance this summer. One in five travellers will be hit.

The tax hike on travel insurance hits cover bought from brokers or banks. The tax added to your premiums when you buy from these outlets rises from 4 per cent to 17.5 per cent on 1 August.

The change will bring the Treasury extra tax of just pounds 15m in a full year. But experts warn that, for the most part, it is holidaymakers who must pay the price. Robert Smith of Douglas Cox Tyrie (DCT), a firm of brokers, says: "Certainly, our insurers are not going to be able to carry it. And, with such a big difference from 4 per cent to 17.5 per cent, there's no way we can absorb it either."

On DCT's estimates, the rise means a family of two adults and three children planning a 17-day trip outside Europe will pay pounds 115.55 instead of the current pounds 102.25 for their cover.

Travel insurance will pay out if you lose your belongings while on holiday, have your holiday delayed, or have to cancel for reasons beyond your own control. But by far the most important element is that it will pay your medical bills if you fall sick or have an accident while abroad. This is particularly valuable outside the European Union, where you will not be able to rely on reciprocal arrangements between your host country and the NHS.

Paul Sparks, of TSB General, the general insurance arm that is part of Lloyds Bank/TSB Group, says: "If you're abroad and you become sick or injured, without travel insurance, you can be financially ruined. I think it's something most people will still feel they have to have, but they will not be happy they've got to pay this extra tax."

If you are a frequent traveller, and buy insurance cover for a whole year at a time, it may make sense to buy your next policy before 1 August to lock in your cover at the lower rate for the next 12 months.

Smith says up to 20 per cent of travellers buy their insurance from banks or brokers, and that these buyers tend to be independent-minded. "Perhaps they're bored with the average package holiday, and looking for something a little bit different," he says. "They're fairly streetwise, and used to shopping around."

The increase in tax puts these travellers on the same footing as people buying from travel agents and tour operators, where premiums have been taxed at 17.5 per cent since 1 April, 1997. Their rate of tax was increased to combat what Customs & Excise saw as creative accounting.

Travel agents often sell a holiday and the associated insurance as a single package. The tax rate payable on travel insurance premiums in 1996 was just 2.5 per cent, as against the 17.5 per cent VAT charged on the holiday element of the package. Customs believed tour operators were loading much of the total transaction on to the insurance side of the books in order to save tax.

The 1996 Conservative Budget therefore increased the insurance premium tax rate to 17.5 per cent for these outlets, bringing it into line with VAT. The standard rate of tax on insurance premiums rose from 2.5 per cent to 4 per cent.

Mike Beaumont of Thomas Cook says: "The Customs & Excise argument was that we were value-shifting as an industry. We never felt that was the case, so we are very pleased it has been equalised now." But the end result has been to give Mr Brown a perfect excuse to raise the rate of travel insurance tax payable to 17.5 per cent for everyone.

Mr Smith believes that brokers and banks will continue to offer better deals. He says: "Products bought direct are still likely to be cheaper, because the travel agent is putting a fairly hefty mark-up on it. Buying direct will still be a better deal for the customer."