What is Insurance Premium Tax? Find out more about IPT and how it will cause prices to rise from 1 October, 2016.
Although it's little-known, Insurance Premium Tax (IPT)† has been a drain on the pockets of UK consumers for many years.
In the early 1990s, the UK government believed that the insurance sector was under-taxed because it wasn't subject to VAT.
Consequently, it brought in IPT, which works in a similar way to VAT in that it's added to the total price of insurance policies.
When the tax started in 1994 the standard rate of IPT was set at 2.5%, but this climbed slowly to its early 2015 level of 6%.
IPT became more burdensome when a change announced in the July 2015 Budget† came into force on 1 November, 2015.
The change - aimed at raising an extra £8.1bn for the Treasury by 2021 - saw the standard rate of the tax increase to 9.5%.
An extra 0.5% increase was then announced in the March 2016 Budget, which will take IPT to 10% from 1 October, 2016.
Chancellor George Osborne has justified such rises by saying that "Britain's insurance premium tax is well below tax rates in many other countries".
The increased rate hits those paying higher premiums the hardest
Matt Oliver, Gocompare.com
There has been criticism from within the insurance industry, though, the British Insurance Brokers' Association (BIBA) describing it as a 'stealth tax' on UK households.
Some warned that it would encourage people to forego insurance, potentially leaving them without valuable protection, or even leading to more illegal activity, such as a rise in the numbers of uninsured drivers.
"Whether it's a legal requirement or you want to buy extra cover, insurance is a financial safety net, not a luxury," said James Dalton of the ABI.
"While insurance remains one of the most competitive industries in the UK, its affordability can't be taken for granted. Further tax increases must be avoided if insurance is to remain accessible for all."
The tax also applies to administration charges levied on such policies, meaning consumers could end up paying more for things such as address changes.
Some insurance areas will not be affected, though, because they are already charged IPT at the higher, 20% rate; examples include travel insurance, mechanical/electrical appliances insurance and some forms of motor insurance.
Other sorts of policies are specifically excluded from this tax, including life insurance.
Unfortunately, IPT rises impact most on many of those who can least afford it - groups such as young drivers who already face the highest premiums.
"Insurance premium tax is paid as a percentage of your car insurance premium," said Gocompare.com's Matt Oliver.
"Therefore an increased rate hits those paying higher premiums - such as young drivers - the hardest."
While there's no getting away from the fact that IPT rate rises are likely to lead to higher insurance premiums over time, there are a number of ways to try to minimise the impact.
Try following our top money-saving tip of shopping around for cover every time you need insurance to avoid the perils of auto-renewal, and read our insurance articles for more help and guidance on keeping down the costs.
"While the motor insurance market is very competitive, insurers typically reserve the best deals to lure new business, rather than to reward existing customers at renewal," said Oliver.
"The only way to be sure that you're being offered a good deal is to shop around and compare quotes from lots of different providers."