Your money: A tax to hit the holiday-maker

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The Independent Online
Travel agents and electrical suppliers throughout Britain will be watching nervously this weekend to see whether a relatively unnoticed change in last year's Budget could bring sales of one of their key money- making products - insurance - to a grinding halt .

From 1 April, they will have to charge Insurance Premium Tax (IPT) of 17.5 per cent to customers who buy a holiday or a fridge and want travel insurance or a warranty to go with it.

The difference could be significant. According to Columbus, one telephone travel insurer, companies such as Thomas Cook, Going Places and Lunn Poly may have to increase the price of their insurance by 15 per cent. To subsume it in their overall costs would be expensive.

This hike in charges was announced by the Chancellor, Kenneth Clarke, in November. However, traditional insurance outlets such as brokers or direct insurers will have to charge only 4 per cent. This, to be sure, is also a rise from the 2.5 per cent IPT levels previously levied, but nowhere near the whopping extra cost of obtaining cover from travel companies.

One likely consequence of the Chancellor's decision, particularly if sales of holiday insurance and warranties dive after 1 April, is that the cost of holidays and electrical goods may become more "transparent" - ie they may go up.

For years, travel operators have been able to recoup part of the cost of the cheap holidays they offered from sales of their cover. Similarly, that bargain-priced washing machine was paid for through the additional five-year warranty taken out "for piece of mind" at the time of purchase.

The practice of subsidising prices by higher insurance fees was bitterly resented by consumer organisations, which claimed them to be a rip-off. Smaller outlets, which could not or did not want to compete in the warranty or travel insurance markets, also resented this cross-subsidy, arguing that it was forcing them out of business. No longer.

In both cases, using a travel agent for that all-in holiday package, including insurance, is now much dearer than getting it from one of the many telephone brokers. If going on holiday this summer, or planning to use a building society windfall to rejuvenate the kitchen, check the prices before committing yourself to buying cover, or you may be paying through the nose. In future issues we will tell you whose prices are best.

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