Motorists set to pay £1 billion a year after 'stealth' insurance tax hike

A compulsory insurance tax hike will force up the cost of  all car insurance policies from next week – with motorists expected to pay more than £1 billion a year in tax for the first time.

The increase in Insurance Premium Tax (IPT) from 6% to 9.5%, announced in George Osborne’s summer budget, will add an extra £12.80 to the average car insurance policy, warns the RAC – with young drivers expected to be hit the hardest.

Young drivers (25 and under) pay an average of £810 a year for their insurance while 18 to 20-year-olds paying £972 a year. The insurance premium tax (IPT) rise would take their next renewals to £838 and £1,006 – increases of £28 and £34 respectively.

Taking other taxes into account, including fuel duty, IPT and annual vehicle excise duty (car tax), a typical driver will now pay in the region of £1,200 a year to the Treasury.

RAC Insurance director Mark Godfrey said: “Insurance is – rightly – mandatory for anyone getting behind the wheel. The 3.5% hike in IPT is another stealth tax like fuel duty that has unreasonably added to the already considerable contribution made to the Treasury by motorists.

“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.

“What’s more, these changes significantly raise the bar for anyone wanting to start driving for the first time. Young drivers tell us that the cost of insurance is the biggest barrier to them owning and running a car after passing their test.

“Sixty-two per cent of young drivers surveyed by the RAC felt this was the case as opposed to 22% who felt it was buying a car and 12% who cited day-to-day running costs.”

Eight out of 10 motorists surveyed by the RAC said they were unaware of the insurance tax hike.

Motorists’ annual tax contribution – how it all adds up

Tax Description Motorists’ total contribution in 2014
Fuel duty 57.95p paid on every litre of fuel bought £26.4bn
VAT on fuel 20% of all automotive fuel sales £6.3bn
Vehicle Excise Duty Paid every year according to a vehicle’s CO2 emissions £5.9bn
Insurance Premium Tax Forms part of the cost of motor insurance £624m