What is insurance premium tax and how will the rise affect my car insurance?

If you thought the cost of car insurance was already extortionate, brace yourself, because it could be about to get worse.

A few years ago, most people had probably never heard of Insurance Premium Tax (IPT), but that’s all changed because the government keeps increasing it.

It was initially introduced in 1994 at four per cent, and in 2015 it was increased for only the second time from six per cent to 9.5. A year later, it crept up to 10 per cent, and now another two per cent has been added.

That means IPT has doubled in just a few years.

The hike will affect almost every type of insurance, including car, travel, pet and private medical policies.

However, a Treasury spokesman said: “Insurance premium tax is a tax on insurers, not consumers – insurance firms decide whether to pass it on to their customers or not.

“IPT is higher in several European countries, including France and Germany, than it is in the UK.”

That means that just because the tax has increased, consumers won’t necessarily see a rise – though it might be optimistic to think otherwise.

If your car insurance is up for renewal soon you’ll no doubt be wondering how this will affect you.

Assuming the tax rise is passed on to customers, fortunately it shouldn’t cause a drastic rise in the cost of your policy. The Association of British Insurers (ABI) estimates that a typical 19-year-old could be faced with an increase of about £20 for their annual bill.

While the cost of car insurance alone isn’t expected to rise too drastically, if the IPT tax rise is passed on to consumers across different types of insurance it could see the average household’s annual insurance bill rise by £283.

To help combat that overall sum, there is an option that could help lower your car insurance – a “black box”.

Some motorists will be uncomfortable knowing there’s a device tracking their car, but the data is only used to analyse driving performance and advise whether a discount should be offered.

Kevin Pratt, consumer affairs expert at MoneySupermarket, recommends using one of these devices, known as Telematics.

He said: “Telematics offers a cheaper alternative to traditional policies if the driver can demonstrate he or she is a lower-risk proposition than the statistics for their demographic suggest.

“Black boxes also make the roads safer by incentivising good driving habits.”

It could be a small price to pay to pay a small price on your car insurance.