But Biba and ABI fear a ‘tax on people’ will deter consumers from taking out insurance

The first increase in the main rate of insurance premium tax (IPT) for more than a decade has been greeted by disappointment tinged with relief.

Chancellor of the Exchequer George Osborne announced in Tuesday’s emergency Budget that the lower rate of IPT would increase from 5% to 6% with effect from 4 January 2011 – the first rise since 1999. He also said the higher rate of 17.5% will be hiked to 20% on the same date.

Allianz finance director George Stratford commented that the rise was much lower than had been widely expected.

He said: “Under the economic conditions the country finds itself, I saw a rise in IPT as almost inevitable. A one percentage point rise to 6% is of course unwelcome, but considerably better than many people in the industry had feared.”

Accountancy firm TMF partner Richard Asquith said the rise in the main rate, with which the Treasury hopes to raise £500m a year, was small beer in the context of the £90bn a year Osborne is seeking to claw back through cuts and tax rises. “In terms of the IPT rate going up, this was the great escape,” he said.

But the ABI and Biba warned that the increased rate would give consumers and small businesses fewer incentives to take out insurance. The ABI predicted that the 1% increase would add an extra £6 and £8 to average motor and household premiums, respectively.

An ABI spokesman said: “This is a tax on people who are doing the responsible thing. I would hope it does not put them off from taking out insurance.”

Other measures announced by Osborne included a commitment to legislate on reforming the taxation of UK companies’ foreign branches.

Colin Graham, insurance tax partner at PricewaterhouseCoopers said the announcement represented a “clear shift” on the issue, which has spurred UK insurers to move to lower tax regimes.