Your Money: Clarke's new tax that might do consumers a favour Clarke puts the squeeze on warranties and travel cover

Taxes can sometimes be good for you. The Chancellor last week whacked up tax on warranties sold with electrical appliances and on travel insurance sold with holidays. The move was relatively unnoticed in a Budget that had few measures that directly affect savers and borrowers. But the increase, which threatens to put 15 per cent on the cost of insurance sold with other goods, should also add to pressure to clean up the selling of these policies.

The measure was tagged onto the back of an increase in insurance premium tax (IPT) from 2.5 per cent to 4 per cent, which itself is expected to feed through into higher premiums from April, particularly for car drivers.

Claiming it as an attack on tax-avoidance by retailers, the Chancellor announced that policies sold with holiday packages, household appliances and used cars (mechanical breakdown insurance) would be taxed more heavily from April, at a rate of 17.5 per cent, equivalent to VAT.

All too often these policies are poor value and can be bought cheaper elsewhere but are hard-sold or a requirement of a deal and can be used as a way of disguising the true price of holidays particularly.

Electrical warranties are pushed by shops and can be linked to particular discounts, and many people might well get a better deal buying one of the specialist policies sold separately by financial firms such as Norwich Union and the TSB. The Consumers' Association says many shop warranties are poor value and the Office of Fair Trading has already criticised shops for failing to give customers adequate information about what they are buying.

In announcing the levy the Chancellor said that some retailers were artificially inflating the price of their warranties as a way of avoiding value-added tax. Should they pass on the new levy in even higher prices this should help highlight that consumers might well be better off shopping around for cover.

Alternatively, the loss of the tax avoidance advantage may push retailers into charging prices that more fairly reflect the cost of the warranty, or even into no longer selling warranties. The downside, however, could be that reduced profits from warranties would mean higher prices of appliances generally.

By contrast, getting a particular holiday discount or deal from a travel agent or tour operator is all-too often dependent on taking out an insurance policy from the same company. The Office of Fair Trading says this conditional selling can lead to consumers being sold unsuitable or expensive insurance. The Monopolies and Mergers Commission is considering banning the practice. As with warranties the 17.5 per cent levy could help highlight the value of shopping around, even if this means losing a holiday discount or otherwise being penalised. Jonathan Biles, the chief executive of WorldCover Direct, a specialist travel insurer, said: "This makes the case for a specialist policy more compelling." Or it could also add to the pressure for more transparent pricing, with the same downside that the prices of the holiday part of the package might rise.

Elsewhere, insurers are insistent that they intend to pass on the increase in the basic rate of insurance premium tax. With premiums already rising on motor policies after a period of fierce price competition, car insurers in particular say they cannot afford to absorb the extra cost. But the tax also affects house, private medical insurance and travel insurance sold direct.

Behind the income tax cut headlines Kenneth Clarke made little progress towards the Conservatives' stated goal of getting rid of capital gains tax and inheritance tax. From next financial year the first pounds 6,500 of profits made from the sale of shares and other assets like second properties will be tax-free, up from pounds 6,300 for this year. But the increase simply reflects the traditional uprating in line with inflation. Inheritance tax is levied on estates left by the dead and on gifts made within seven years of death. The Chancellor increased to pounds 215,000 the amount of estates (which include houses) which is tax-free. This pounds 15,000 increase, which is three times inflation, should keep the number of taxpaying estates to 14,000 in the next year, according to Inland Revenue. But it also means that people should not ignore the range of wheezes available, while still alive, to reduce their potential bill.

One final change for the cash-strapped - people who rent out rooms in their own home will from April be able to receive pounds 4,250 rent a year tax- free, compared with pounds 3,250 this year.

The Budget in brief

q Basic rate of income tax down to 23 per cent.

q Personal allowances up, more of income to be taxed at 20 per cent. Forty per cent tax to kick in at higher level.

q Tax-free capital gains allowance up to pounds 6,500.

q Tax-free inheritance tax allowance up to pounds 215,000.

q Insurance premium tax up to 4 per cent; up to 17.5 per cent on policies sold with other goods.

q Tax-free rent from letting out rooms up to pounds 4,250.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

Greece referendum

Greeks say 'No' to austerity and plunge Europe into crisis
Ten years after the 7/7 terror attacks, is Britain an altered state?

7/7 bombings anniversary

Ten years after the terror attacks, is Britain an altered state?
Beautiful evening dresses are some of the loveliest Donatella has created

Versace haute couture review

Beautiful evening dresses are some of the loveliest Donatella has ever created
No hope and no jobs, so Gaza's young risk their lives, climb the fence and run for it

No hope and no jobs in Gaza

So the young risk their lives and run for it
Fashion apps: Retailers roll together shopping and social networking for mobile customers

Fashion apps

Retailers roll together shopping and social networking for mobile customers
The Greek referendum exposes a gaping hole at the heart of the European Union – its distinct lack of any genuine popular legitimacy

Gaping hole at the heart of the European Union

Treatment of Greece has shown up a lack of genuine legitimacy
Number of young homeless in Britain 'more than three times the official figures'

'Everything changed when I went to the hostel'

Number of young homeless people in Britain is 'more than three times the official figures'
Compton Cricket Club

Compton Cricket Club

Portraits of LA cricketers from notorious suburb to be displayed in London
London now the global money-laundering centre for the drug trade, says crime expert

Wlecome to London, drug money-laundering centre for the world

'Mexico is its heart and London is its head'
The Buddhist temple minutes from Centre Court that helps a winner keep on winning

The Buddhist temple minutes from Centre Court

It helps a winner keep on winning
Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate