Budget Special: Air taxes take off as travel business soars

THE BUDGET AND YOU: Air travel insurance

Consumers are being threatened with hikes in the price of insurance, holidays and air tickets after the Chancellor announced increases in insurance premium tax and air-passenger duty.

But the increases - which might add pounds 3 to the the cost of the average motor policy and up to pounds 10 to the cost of a holiday or air tickets - are not due to come in until April and November next year respectively.

The Chancellor increased insurance premium tax (IPT) to 4 per cent of the price of the policy, up from 2.5 per cent. Some policies - travel insurance bought through agents and those policies sold by shops to cover electrical appliances, for example - face levies of as much as 17.5 per cent. Separately, air-passenger duty is doubled to pounds 10 on European and domestic flights, and to pounds 20 on flights to destinations outside of Europe.

Although the increase in insurance-premium tax was less than expected, insurers said the change would be passed on in rising premiums, particularly to car drivers where premiums are already on the rise after a period of fierce price-cutting.

The tax also hits other major insurances, including house contents and buildings, and private medical insurance.

Mark Boleat, director general of the Association of British Insurers, said insurers were "saddened" at the increase: "[It] is a regressive tax on the prudent. Insurance is not a luxury, and should not be taxed as such."

He said that with the rises the average household would be paying around pounds 1 a week in IPT and more than pounds 3 a week overall on insurance taxes.

The Chancellor noted that even with the rise, Britain's rate of IPT is still one of the lowest in Europe.

The introduction of a 17.5 per cent on some insurances sold with other products is described as an anti-avoidance measure. Sellers of electrical appliances, for example, have previously avoided VAT by inflating the the cost of the VAT-free insurance while reducing the VAT-able price of the appliance.

Air-passenger duty is levied on all plane tickets to, from and within the United Kingdom. The president of the Association of British Travel Agents (Abta), Colin Trigger, said: "This increase in an already unpopular tax on travellers will be most unwelcome ... More importantly, it will hurt the UK economy as foreign visitors will see Britain as more expensive and less competitive as a result, especially coupled with a stronger and recovering pound."

Abta said that with the average package holiday costing just pounds 360 and the low margins that tour operators worked under, the increase would be passed on.

"This will be a major increase for a small charter flight," said an Abta spokeswoman. A spokesman for British Airways said the duty and its increase discriminated against fliers in favour of people who travelled by train and ship.

The change will not come into place until after next summer's holiday season and after the general election. The delay reflects that holiday brochures for next summer have already been published.

Both insurance premium tax and air-passenger duty are fairly new levies. Air passenger duty was announced in the 1993 Budget, insurance premium tax - at an initial rate of 2.5 per cent - in the November 1994 Budget. In announcing the latest increase, the Chancellor said that insurers had absorbed the cost. This seems less likely this time round.