Car insurance premiums will likely rise following tax increases in this year's budget, but the impact will be lower than expected.
Chancellor George Osbourne announced that the insurance premium tax on general insurance such as car and home cover will rise from 5% to 6%. It had been feared the rise could be to 10%, or that it would rise even further and be aligned with the standard rate on Value Added Tax.
Tax on some other forms of insurance, most notably travel insurance and extended warranties, will rise from 17.5% to 20%, mirroring the general rise in VAT. The changes take effect from 4 January 2011.
Insurers reacting to the news generally expressed relief that the rises were not as steep as some had expected, but still argued it was wrong to increase tax on a financially responsible activity like taking out insurance.
Travel insurers remain disgruntled at the disparity between the two insurance rates and note that this may deter people from taking out travel policies, particularly as they are discretionary unlike car insurance.
The size of both increases means it may be difficult to tell whether insurers have directly passed the additional costs on to consumers, or absorbed them in an attempt to remain competitive. It seems likely any tax-related premium hikes will be outweighed by more general rises associated with factors such as fraudulent claims and an increase in compensation claims related to accidents.
