Millions of households and motorists will see a steep rise in the cost of new insurance policies taken out or renewed from now on, after Insurance Premium Tax (IPT) was hiked from 6% to 9.5% at the start of the month.
The increase, first announced in July's Summer Budget, will hit pet, car, mobile, contents, building, breakdown and private medical insurance policies.
On top of this hike, car insurance prices are predicted to rise 15% during 2015, and have already shot up 9.2% in the past 12 months to an average of £569, according to the AA's latest price index.
But there are ways to beat the hikes, as we explain below. Also see our Insurance Guides for more help on cutting costs.
What is IPT?
IPT was first introduced in October 1994. It's a tax on insurance premiums, which insurers typically add to the price consumers pay for their policies.
It last rose in January 2011 when it increased from 5% to 6%.
However, IPT isn't applied to all types of insurance; for example life insurance and income protection. HMRC says there are different reasons for different types of insurance being exempt, but with life insurance and long-term insurance, it's because these are largely savings products and customers get back the majority of premiums paid in.
Travel insurance meanwhile is subject to IPT, but at a higher rate of 20%, which isn't changing.
How to beat car insurance hikes
Motorists have been hit hardest by the IPT rise which, according to the AA, is likely to add £18.80 to the average premium. Young drivers however will see even bigger hikes with an extra £42 added to average policies.
But while it's impossible to stop rising prices, there are ways to cut costs now. And for more tips and tricks, see our full Cheap Car Insurance and Young Drivers' Insurance guides.
- You can slash your premium even if you're not at renewal. Unless you've claimed, for around £50 you can generally cancel and get a refund of the remainder of the policy, although you'll lose the year's no-claims bonus.
- Adding a second driver to your policy, such as a parent, can save £1,000s as it brings down the average risk average, which can be especially helpful for young drivers.
- Tweaking your job description is another way to cut costs. An editor rather than a journalist, for example, may cut £100s from a yearly premium.
Counteract rising insurance costs in general
As outlined above, it's not just motor insurance that's affected by the IPT increase, other types of insurance have also been hit.
The rise is likely to add more than £10 to an average combined building and contents policy, as well as £10 to an average pet insurance policy, according to the Association of British Insurers (ABI).
It also estimates that an average private medical policy is likely to rise by more than £40, while overall a family with two cars and pet and medical insurance is likely to pay almost £100 a year more on average.
But again there are ways you can beat the hikes, for example:
- Combine comparison sites to get a benchmark price. Once done, check the insurers they miss, such as Direct Line and Aviva – including if they have any special offers or freebies only available directly. This way you'll ensure you always get the best deal.
- Haggling is a great tool to use when you're at renewal, but again, always check comparison sites to see if the price your existing provider offers can be beaten.
- Once you've found the cheapest deals, check if you can get cashback on top.
See our range of cost cutting insurance guides for full help.
'The IPT rise will only pile on the misery'
Janet Connor, AA Insurance's managing director, says the IPT increase could not have come at a worse time. "Already, premiums have risen by nearly 10% over the past six months and the IPT rise will only pile on the misery," she says.
"We believe that the tax increase will encourage some young drivers to attempt to drive without insurance."
Mark Godfrey, insurance director for the RAC, echoed this sentiment. He says: "With insurance premiums currently going up faster than they have in the last five years, it's sadly going to be a double whammy of bad news for the motorist."