Treasury stealth tax on insurance to raise £55.7bn

The Treasury is cashing in on a ‘regressive’ stealth tax on the soaring cost of insurance – hammering households in the process.

Budget documents show insurance premium tax (IPT) on everything from home and car cover to pets and travel will raise £55.7billion over the next six years – £3.4billion more than previously expected.

The haul is due to rise steadily from £8.8billion this year to £9.7billion in 2029-30, according to projections from the Office for Budget Responsibility (OBR).

The tax take is around £700m a year higher than previously expected because of the rising cost of insurance premiums.

It means households facing more expensive cover are also hit with a higher tax bill in a punishing double-whammy.

Critics of the stealth tax believe it should be cut to ease pressure on hard-pressed families – many of whom do not even realise they are paying it. Direct Line boss Adam Winslow told the Mail: ‘In total, someone with a motor and home insurance premium is probably paying a little over £100 in IPT which is comparatively a lot of money.’

The measure was ‘a regressive tax in terms of the way it works’, he said, as those living in areas with higher crime and accident rates already pay more so will be hit harder by 12 per cent being added to their bills.

Over two-thirds of taxpayers have ‘little or no knowledge’ of IPT despite around 84 per cent of households paying it, according to the Association of British Insurers. The industry group has labelled it the UK’s ‘hidden in plain sight tax’.

IPT was introduced in 1994 at a rate of 2.5 per cent and raised just £117m for the Treasury that year. Tony Blair’s government established two tiers of insurance tax in 1997-98 – a standard rate of 4 per cent for home and car insurance and a higher rate of 17.5 per cent on products like cover for breakdowns, pets and travel. That pushed the tax take above £1billion for the first time.

The Coalition raised the two rates to 6 per cent and 20 per cent in 2011 – sending revenues above £3billion. The higher rate has been frozen at that level since, but the main levy continued to rise before hitting 12 per cent in 2017.

To make matters worse, insurance premiums have soared in recent years.

DIY INVESTING PLATFORMS

AJ Bell

AJ Bell

Easy investing and ready-made portfolios

Hargreaves Lansdown

Hargreaves Lansdown

Free fund dealing and investment ideas

interactive investor

interactive investor

Flat-fee investing from £4.99 per month

Saxo

Saxo

Get £200 back in trading fees

Trading 212

Trading 212

Free dealing and no account fee

Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.

Compare the best investing account for you