Budget 2016: insurance tax raised to 10%Increase of 0.5% to bring in £700m for flood defences

16 March 2016

George Osborne

The government has increased insurance premium tax (IPT) to 10% in a bid to raise £700m to boost flood defences.

IPT, which is currently 9.5%, was increased from 6% in November 2015 following the Summer Budget.

According to the government, the increase – if passed on by the industry to policyholders – will add £1 to an average combined buildings and contents policy and £2 to the average motor insurance policy.

Find out more: Budget 2016 - Which? rounds up the key announcements

Not the increase expected

Chancellor George Osborne said: “To respond to the increasing extreme weather events our country is facing, I am today proposing a further substantial increase in flood defences. That would not be affordable within existing budgets. So I am going to increase the standard rate of IPT by just half a percentage point – and commit all the extra money we raise to flood defence spending. That’s a £700m boost to our resilience and flood defences.”

The 0.5% increase was much lower than the rumoured 3% surge in IPT rates, which the Association of British Insurers claimed could result in £100 of extra costs for UK households.

However, the British Insurance Brokers' Association (Biba), claimed that funds raised from the previous rise in IPT could have been used to fund flood defences. Biba chief executive Steve White said: “Whilst we support the additional spending on flood defences, we believe that this could have been funded by the projected £1.5bn annual funds paid to the exchequer as a result in 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.”

With the IPT revenue, the government will increase maintenance expenditure in England by £40m per year and invest £150m in Leeds, York, Calder Valley, Carlisle and wider Cumbria.

Tackling whiplash claims

The latest IPT increase comes after the government announced new measures to cut the cost of car insurance by tackling fraudulent whiplash claims.

The reforms, which were announced in the Autumn Statement in 2015, would end the right to cash compensation for minor whiplash injuries. Whiplash claims cost the UK £2bn a year and add to the cost of your annual car insurance premium. The consultation is expected to be launched later this year.

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