Consumers faced with increase in insurance premiums

Consumers face further hikes in insurance bills with the lower rate of insurance premium tax (IPT) upped to 6 per cent and the higher rate – which covers travel insurance – hitting 20 per cent. The measures will raise £455m in the first year.

But experts said that the increases could have been worse and noted that British IPT still remains low by European standards, where the tax is frequently equal to VAT. The current UK rates are 5 per cent and 17.5 per cent.

Car insurance premiums have been steadily rising over the last year, although that has started to tail off, and the industry reacted with anger to the increases saying they penalised sensible consumers.

The Association of British Insurers described the IPT rise as "a direct tax increase for the vast majority of people who sensibly protect themselves and their families with insurance. This is regrettable and could have serious unintended consequences if it puts off consumers from protecting their homes, cars, holidays and everyday living."

The ABI said that a 1 per cent increase in IPT will mean an increase of £7.99 per year in premiums from £839 to £846.99 for the average household.

Eric Galbraith, the chief executive of the British Insurance Brokers Association (Biba), said: "This is a tax on protection. Biba's research last year demonstrated that businesses and consumers were reducing insurance cover as a result of the recession and we are concerned that increases to insurance premiums as a result of IPT could lead to even further under-insurance or even a lack of insurance protection. The last thing people need in a financial crisis is a higher insurance bill."

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