Insurers have breathed a sigh of relief after the Chancellor announced a freeze in the rate of insurance premium tax.

But the Budget contained a bitter pill in the form of a review of the tax treatment of insurers' claims provisions. The ABI said it was relieved the Chancellor had decided to keep IPT at 5% for general insurance, following an increase of 1% last year. A higher rate of 17.5% is levied on consumer warranties and travel policies.

The policy tax is believed to raise £1bn a year.

Since its introduction by Norman Lamont in 1993, IPT has been criticised by insurers for being regressive to people on low incomes and discouraging prudence.

John Castagno, managing director of general insurance at Legal & General, said: "There were fears that IPT was seen as a soft touch and closing the gap between the higher and lower rate was always an option for the Chancellor."

However, budget experts are concerned the Chancellor may eventually be tempted to increase IPT rates to the levels seen in other European countries.

Cathy Hargreaves, IPT expert at PricewaterhouseCoopers, said: "It is inevitable that IPT will go up because tax rates in Europe are considerably higher than in the UK."

In France, IPT is levied between 7% and 24%, while Denmark is believed to charge the highest rate, at 50% on motor liabilities.