"On behalf of insurance policyholders, we are surprised, saddened and disappointed that the Chancellor has decided to increase the rate of insurance premium tax for non-life insurances," said Mark Boléat, Director General of the Association of British Insurers.

The Budget announcement was that the rate of insurance premium tax (IPT) would increase from the present 2.5% to 4%. What the Chancellor did not say, but is revealed in a from HM Customs and Excise is that the rate for some insurances will not increase to 4% but will be 17.5%, where insurance is sold by the seller of another product. The 17.5% rate will apply to mechanical breakdown insurance (eg on domestic electrical appliances and secondhand cars), travel insurance, and insurance sold with TV and car hire in this way, but not where bought direct from an insurance company or broker.

Mark Boléat said:

"To have two rates of tax for the same type of insurance depending on who sells it is unworkable and unrealistic. The 4% rate is bad, the 17.5% rate is beyond belief."

Individuals and businesses will face higher insurance bills on most of their non-life policies such as buildings and contents insurance, motor insurance and medical insurance. The cost of some types of insurances sold with other products would rise significantly as a result of the 17.5% new tax.

In its pre-Budget submission to the Chancellor, the Association put forward a very strong case for IPT to be withdrawn. Policyholders already pay almost £4 billion in taxes such as irrecoverable VAT, IPT and other Government levies. This total will increase to £4.5 billion with today's announcement.

Commenting on the increase, Mark Boléat also said that:

"IPT is a regressive tax on the prudent. Insurance is not a luxury, and should not be taxed as such. The Chancellor was wrong to say non-life insurance policyholders are under-taxed. With the rise in the tax, the average household will be paying around £1 each week in IPT and a total of over £3 a week in Government taxes and levies on insurance. Averages can be deceptive and this latest tax increase will hit the poorer members of society much harder than the better off. Our research shows that the poorest 20% of the working population pay a four times greater proportion of their income towards motor insurance than the highest paid 20%. On buildings insurance, it is five times and, on home contents, four times."

Opinion research conducted by Gallup for the Association has shown that the public believe that to increase IPT is a very unfair way to raise money. This survey showed that:

• 71% overall thought IPT an unfair method of taxation.

• Only 4% felt that increasing IPT was a fairer way to raise tax revenue than increasing VAT or income tax.

Mark Boléat said:

"We can only hope wise counsel will prevail and this increase in IPT will not be pursued by Government. We do not believe insurance policyholders will welcome a reduction in income tax if it has to be paid for by higher insurance premiums."

Notes

1. Insurance premium tax was announced in the November 1993 Budget to apply,with effect from 1 October 1994, to most forms of general insurance.

2. The IPT rate to date has been 2.5% which in 1996/97 was estimated to raisearound £750 million. At 4% the tax would raise £1.2 billion in a full year.

3. Average annual premiums paid by households on non-life insurances in 1995were:

   • Buildings £190 (IPT @ 4% adds £7.60)
   • Contents £125 (IPT @ 4% adds £5.00)
   • Motor £340 (IPT @ 4% adds £13.60)
   • Medical £380 (IPT @ 4% adds £15.20)
   • Other, eg creditor £140 (IPT @ 4% adds £5.60)

4. Enquiries to:

   Tony Baker +44 020 7216 7400 (Home +44(0)1920 465000)
   Suzanne Moore +44 020 7216 7411 (Mobile 0378 794717)
   Malcolm Tarling +44 020 7216 7410 (Home +44 020 8297 9510)

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