Britain’s finance minister George Osborne said on Wednesday he would raise the tax on motor and home insurance premiums by 0.5 percentage points to 10 percent to fund flood defenses, boosting insurance shares as the rise was smaller than anticipated.
The tax hike follows a 3.5 percentage point rise in insurance premium tax last year.
“I am going to increase the standard rate of Insurance Premium Tax by just half a percentage point – and commit all the extra money we raise to flood defense spending,” Osborne said in the annual budget speech.
Roadside recovery firm the AA [the Automobile Association] said the latest tax hike was smaller than the 3 percentage point rise it had expected.
Insurers passed the previous tax rise onto customers, contributing to an 8 percent rise in motor insurance premiums in 2015. But further tax rises were seen as more difficult to pass on.
Motor insurers Admiral and Direct Line were up 0.4 percent and 2.2 percent respectively at 1533 GMT.
“While a further increase in insurance premium tax could be an additional increase to household finances, we are pleased that the government has committed to use the spend on flood defenses,” Direct Line Chief Executive Paul Geddes said in a statement.
The tax hike will allow an increase in flood defense spending of more than 700 million pounds ($985.88 million) by 2020-21, the Treasury said in the accompanying budget statement.
Severe flooding in Britain in December and early January is expected to lead to 1.3 billion pounds in insurance pay-outs, according to the Association of British Insurers.
($1 = 0.7100 pounds)
(Reporting by Carolyn Cohn and Noor Zainab Hussain, editing by Sinead Cruise and Jon Boyle)
(Editor’s note: The British Insurance Brokers’ Association said it was “astonished that the chancellor decided a further increase in insurance premium tax is required to strengthen the nations flood defenses.” BIBA said the U.K. government’s announced IPT increase means that insurance buyers have shouldered an increase in tax of 66.6 percent since March 2015.
BIBA member, the AA, previously surveyed 29,000 drivers and found that 87 percent “believed the tax was unfair and that increases will encourage some drivers to attempt to drive without insurance,” BIBA said in a statement.
Although IPT is a tax collected and remitted by insurers, it is a tax on premiums paid by policyholders: motorists, householders and businesses large and small, according to BIBA CEO Steve White.
“Let’s be clear about this — while we support the additional spending on flood defenses, we believe that this could have been funded by the projected £1.5 billion [$2.1 billion] annual funds paid to the exchequer as a result of the increase in IPT put in place only last November, which puts an increased burden on policyholders, many of whom are suffering from ongoing flood damage.”)