Millions of households and motorists will pay more after Chancellor George Osborne hiked insurance premium tax (IPT) by 0.5 of a percentage point in today's Budget.

The rise from 9.5% to 10%, which will come into effect on 1 October, is less than the 3 percentage point hike that had been widely predicted. But it follows a hike from 6.5% to 9.5% last November and is likely to mean a further rise in the cost of pet, car, mobile, contents, buildings and private medical insurance.

The Association of British Insurers (ABI) has warned that changes to IPT will affect over 26 million drivers and 20 million households. Osborne says he would ring-fence the extra money raised to pay for improved flood defences across the North of England.

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What is IPT?

The IPT is a tax on insurers but the cost is passed on to consumers through the price of policies.

The Government's own figures predict that the average comprehensive motor insurance policy will go up by £2 while the average combined building and contents policy will increase by £1.

This is in addition to last November's IPT increase, which added nearly £13 to the average comprehensive motor insurance policy and over £10 to the average combined building and contents policy, according to the ABI.

The ABI says it's those who pay the highest insurance premiums – typically older and younger drivers as well as households in inner-cities or high flood-risk areas – who will be affected most by the increase.

There may also be an increase to any administration fees charged, for example for changing the name or address on a policy, as the tax is levied at this stage too.

Does the increase affect all insurance policies?

No – not all types of insurance will be affected. Travel insurance policies, for example, will be excluded from the hike because they are already charged at a higher rate of 20%, which isn't changing. Life insurance and mortgage protection are also exempted from the tax.