Insurers have reacted angrily to the chancellor’s decision to raise insurance premium tax by a fifth, from 10 per cent to 12 per cent in the Autumn Statement.
The tax, which is levied on general insurance policies such as home, motor and health, stood at 6 per cent just over a year ago but had been increased twice since then.
The latest increase will take effect next June and will raise about £840m in extra tax revenue per year. But while the proceeds of the last increase were earmarked for flood relief projects, Philip Hammond would only say that the latest rise would be used “to fund spending commitments”.
In his statement, Mr Hammond pointed out that: “Insurance premium tax in this country is lower than in many other European countries, and half the rate of VAT.”
Huw Evans, director-general of the Association of British Insurers, said the increase was a hammer blow for the hard pressed. “It will hit consumers and businesses alike, hurting those who buy business, motor, property, pet and health insurance,” he said.
Mr Hammond attempted to soften the blow by reiterating the government’s plan to cut the amount that insurers have to pay for whiplash injuries. Proposals were unveiled last week to wipe £1bn off the cost of claims. If passed on to consumers, that would cut about £40 off the cost of an annual car insurance policy.
Amanda Blanc, chief executive of Axa UK, called the insurance premium tax increase: “an unwarranted attack on millions of people simply looking to protect themselves.
“This is a classic case of the government giving with one hand, in the form of whiplash reforms, and taking with another,” she said. “The affordability of insurance is being fundamentally threatened. The country is already underinsured and ever rising insurance taxation could have the unintended consequence of making this situation even worse.”
According to Deloitte the latest increase will cost a family with a house and two cars an extra £21 per year, leaving them with a total annual IPT bill of £126. Before the first of the recent increases, which took effect last October, Deloitte says that the annual bill was £63.
“There comes a point where people don’t insure,” said Daniel Lyons, tax partner at Deloitte. “We may not be there yet but the more expensive insurance becomes, the more there’s a possibility that people will be less likely to take out a policy. From a public policy point of view, I’m not sure that’s a good thing.”
There was some better news for the industry elsewhere in the government’s announcements. Draft regulations were published on Wednesday that would allow insurance linked securities to be issued in the UK. These securities allow investors to back risks directly, rather than going via an insurance company, and are becoming increasingly popular in specialist commercial insurance markets.
Inga Beale, chief executive of Lloyd’s, the insurance market, said: “It is clear that London should be competing in the ILS market which will bring considerable benefit to the London market as a whole, so we welcome today’s announcement from the government. ILS capital has been growing, particularly in global reinsurance, and the London market has the expertise and talent to select the risk that it wants to invest in.”