Insurance Premium Tax hike set to cost motorists an extra £386m a year

29th October 2015


The imminent Insurance Premium Tax (IPT) hike from 6% to 9.5% is set to cost drivers an extra £386m a year.

The move will take their insurance tax contribution to more than £1bn for the very first time.

RAC analysis of industry figures revealed that the tax rise, which comes into effect on Sunday 1 November, is yet another burden on motorists who already contribute over £40bn in motoring taxation every year.

While the rise in insurance premium tax will force up the cost of the vast majority of insurance policies, it is expected to hit motorists hard as they are currently paying around £11bn a year to be able to drive legally.

The IPT tax rise, announced in the Chancellor’s Summer Budget in July, will add £12.80 to an average annual car insurance premium of £367. And, with the price of car insurance rising at its fastest rate for five years this will be doubly bad for the country’s 30m drivers.

The organisation has warned that the situation will be especially hard on young drivers and those new to motoring who face far higher premiums, significantly raising the bar for anyone starting driving for the first time.

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

In terms of overall motoring taxation, a typical driver who fills up an average 55-litre car with diesel twice a month, will now pay in the region of £1,200 a year to the Treasury including fuel duty, VAT paid on every litre of fuel bought, annual car tax and IPT.

Motorists’ annual tax contribution – how it all adds up

Tax Description Motorists’ total contribution in 2014*
Fuel duty £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

The RAC therefore believes the IPT increase unreasonably adds to the tax burden felt by all motorists in the UK, and especially those who are new to driving.

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 drivers⁵ 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.”

To help offset the increase, which will also be felt by consumers buying the vast majority of other insurance products, the RAC is encouraging new motorists to consider a ‘black box’ car insurance policy – which uses telematics technology to base future premiums on an individual motorist’s actual driving, something that is in the hands of the driver to control.

Godfrey added: “Even though the IPT hike is being forced on motorists those starting their driving careers can have some influence over their future premiums by choosing a black box-based insurance policy. This uses telematics technology to understand how a driver behaves, with the potential to reward them with lower premiums.”

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