Car insurance comparison could overcome IPT rise

23 June 2010 12:28:40

Osborne is increasing car insurance premium tax.

Motorists are likely to be hit with a rise in insurance premiums following the decision to raise the lower rate of insurance premium tax (IPT) to 6% next year. However, the increase is lower than expected and groups such as AA Insurance have reacted with relief. Here, CompareandSave.com looks at reactions to the Budget announcement and at how drivers could reduce the impact of the small IPT rise by comparing car insurance quotes and shopping around for the best-value deals.

Insurance premium tax

IPT is a tax on general insurance, such as home, travel and car insurance. At present, there is a standard rate of 5% on home and car insurance, while travel insurance is taxed at a higher rate of 17.5%. Now, chancellor George Osborne has announced that the standard rate will rise to 6% on January 4th 2011, while the higher rate will increase to 20% "in line with the increase in the main rate of VAT".

Reaction to the IPT rise

The increase in IPT was certainly not unexpected. Prior to the Budget announcement on Tuesday June 22nd, the AA had responded to speculation that the coalition government might double the standard rate to 10%. Edmund King, president of the AA, warned that such an increase might lead some cash-strapped motorists to "not bother with insurance at all". This, he said, would put further pressure on the premiums paid by honest motorists, as well as leading to a rise in hit-and-run incidents where uninsured drivers fail to stop.

Responding to the news that the IPT rise will not be as steep as expected, Simon Douglas, director of AA Insurance, said that he was "relieved". Mr Douglas explained that car insurance premiums are already rising "very quickly", because insurers are struggling to make up their underwriting losses. "I believe we will see premium increases of up to 20% this year, for the second year running," he revealed. "My greatest concern was that a large increase in IPT would have led to large numbers of people attempting to drive their cars without insurance."

However, the British Insurance Brokers' Association (BIBA) has reacted with less enthusiasm to the lower-than-expected rise in IPT, arguing that any increase will hit consumers. Chief executive Eric Galbraith described the move as a "tax on protection". He claimed: "BIBA's research last year demonstrated that businesses and consumers were reducing insurance cover as a result of the recession and we are concerned that increases to insurance premiums as a result of IPT could lead to even further underinsurance or even a lack of insurance protection." Mr Galbraith added: "The last thing people need in a financial crisis is a higher insurance bill."

Cost-effective management of insurance

Despite the rise in IPT tax, BIBA said that insurance is still "essential" and urged people to "manage their insurance protection in the most cost-effective way". One easy way to do this is to go online and compare car insurance quotes. Many drivers will find they are paying more than necessary for their car insurance and that the money they save by buying a cheaper policy will mitigate or even cancel out the impact of the forthcoming rise in IPT.

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