In just a few days' time, the cost of insurance will begin to edge up as the insurance premium tax (IPT) hike comes into force. But just what's happening, and what will it mean for you and your finances? We take a closer look.
In a nutshell, probably. The standard rate of IPT – or the tax paid each time an insurance policy is bought – is rising from 6% to 9.5% from Sunday 1 November, which means that from then on, almost every policy you purchase will have a higher amount of tax levied on it.
According to figures from the Association of British Insurers (ABI), this change will affect 7.3 million car insurance policies, 4.7 million household policies, 3 million pet insurance policies and another 3 million private medical insurance policies, so chances are, you'll notice the difference.
All eligible policies with a start date after 31 October 2015 will have IPT charges at the new rate, and the ABI calculates that this will add nearly £13 to the average comprehensive car insurance premium and more than £10 to the average home and pet insurance policies. However, those with private medical insurance could face the biggest premium increase of all, with the change expected to add more than £40 to the average policy.
There are certain types of insurance product that are exempt from IPT, including life insurance, mortgage insurance and policies for goods in international transit, as well as various other classes of insurance for more commercial means (insurance for spacecraft, for example, which probably won't be your typical purchase!). Then there are classes of insurance that already face a higher level of IPT, such as travel insurance, which carries a levy of 20%.
In broader terms, it depends on your personal circumstances and the type (and number) of insurance policies you have, but the ABI has calculated that a family with two cars, a pet and medical insurance could have to pay almost £100 a year more once the increase comes into effect, a sum that could put extra pressure on household incomes.
Additional figures from the AA suggest that younger drivers could be particularly affected. Their own calculations suggest that the IPT hike could add an even greater £18.80 to the typical comprehensive car insurance policy, while those aged 17-22 could end up paying almost £42 per year extra – up from an average of £1,278 to £1,319.35 – despite the fact that this is the age group least likely to be able to afford the increase.
"Whether you are a homeowner, driver, own a pet or buy medical insurance, millions of people across the country face being hit in the pocket by this rise in Insurance Premium Tax," said James Dalton, director of General Insurance Policy at the ABI. "Whether it's a legal requirement or you want to buy extra cover, insurance is a financial safety net, not a luxury. While insurance remains one of the most competitive industries in the UK, its affordability can't be taken for granted."
Janet Connor, managing director of AA Insurance, added that the IPT increase couldn't have come at a worse time, with the average cost of insurance already on the rise – and she warns that it could even lead to an increase in the number of younger drivers forgoing insurance in an attempt to beat the tax hike.
"Back in July following the Chancellor's Budget announcement of this stealthy and unexpected tax imposition, the Treasury seemed taken aback when the AA warned them that premiums were expected to rise quickly over the rest of 2015," she said.
"Already, premiums have risen by nearly 10% over the past six months and the IPT rise will only pile on the misery. We have lobbied the Treasury on this issue calling for ministers to think again – or at the very least, exempt young drivers from the tax for at least the first year of buying their first car insurance policy. We believe that the tax increase will encourage some young drivers to attempt to drive without insurance."
While it isn't possible to beat the tax hike in itself – by law, it'll be applied to every eligible policy – there are things you can do to lower the cost of insurance overall, and comparing quotes is the best way to do that. Whether it's time to renew or you want to buy a whole new policy, make sure to use our comparison tool to keep your premiums as low as possible, and you hopefully won't feel the brunt of the tax hike too much.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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