The insurance industry is bracing itself for potential steep rises in taxes on premiums, with predictions it could simply lead to a drop in cover.
At the moment, the tax applies to all forms of insurance except for life insurance and permanent health insurance (also known as income protection insurance, designed to replace lost wages until retirement age in the case of long-term illness). Most premiums are taxed at a 5% rate, though it is 17.5% for both travel insurance and insurance related to purchases such as with extended warranty schemes.
It has been reported that the government is reviewing these rates, with rumors that the 5% rate could either double or be raised to the 17.5% level.
The British Insurance Brokers Association noted that the number of people ditching insurance policies is already rising as a result of the recession. It warned that there was a serious risk that higher tax rates, and thus higher premiums, would mean more people would cut back or even drop insurance altogether.
As well as exposing consumers to greater risk, there is also a theory that such a decline in cover levels might mean the total tax revenue doesn't rise by much and could even fall. The counter-argument is that the insurance market may be competitive enough that many insurers may chose to absorb the tax increase rather than pass it on to customers.
