Called the Insurance Premium Tax, it is added on to the premiums we pay for everyday cover. The standard rate of this tax rises from 5% to 6% from January. It is included in most general insurance policies such as those for buildings and contents insurance for your home, as well as motor insurance.
The higher rate tax is set to rise in line with VAT from 17.5% to 20% at the same time. It is charged on all travel insurance, whether bought from travel agents or direct from insurers, as well as warranties which are generally sold alongside electrical goods and vehicles.
It doesn’t however apply to all insurance - life insurance is free from Insurance Premium Tax.
How will this affect prices?
The industry trade body, the Association of British Insurers (ABI), has calculated how much this will hit average premiums for a typical family.
A middle-of-the-road family car costs £617 to £622 a year to insure, following steep rises last year in motor insurance of 20%. Even if your premiums remain the same, it estimates they will go up by nearly £6 next year but they could climb even higher. The AA is forecasting a further 20% hike in the cost of car insurance.
With home insurance, the ABI reckons that this increase in tax will cost the average household £8 a year more based on a typical buildings and contents policy costing between £839 and £847.
Although the rise in tax on travel insurance looks larger, it will in fact have less impact as cover is generally far cheaper. An annual family policy to Europe costs between £90 and £130 so cover is likely to rise by only £2.47 to £3.27.
Bob Atkinson, travel insurance expert at travelsupermarket.com, said: “The travel insurance market is very competitive. All the fat has been cut from the cost of travel insurance in recent years as new entrants vied heavily with existing companies for customers in this lucrative market.
“Holidaymakers are likely to feel the full brunt of the rise in tax but, since it’s already so cheap, in most cases it will be a few pence on the price of a policy.”
The insurance industry is worried that increased premiums may tempt people to stop insuring their homes and holiday altogether. Already only one in five travellers always cover every trip they take here or abroad, according to research by moneysupermarket.com. And illegal uninsured drivers are on the rise – they push up the average car premium by £30 a year for honest motorists according to the Motor Insurers' Bureau.
How to keep costs down
With prices on the up, it’s more important than ever to compare prices and ensure you’re getting the best deal on your insurance. Independent research found that drivers who use moneysupermarket.com cut the cost of their premium by an average of £205, while you can save an average of £132 on house insurance.
With motor insurance, the simplest way to bring down the price of a policy is to increase the excess - the first amount you pay on a claim. But don't forget that many insurers already have an excess built into their policy, so the amount you volunteer to pay will be added on top of this.
Putting your partner on the policy can also make it cheaper as insurers regard couples as a safer risk than lone drivers. But don’t put anyone under 25 on your insurance. Since young drivers have more accidents, companies load the premium for them.
Don't forget to mention everything that may bring back a lower quote, such as if it’s parked in a garage overnight and if you have an immobiliser, alarm or tracking device.
Good security also helps to reduce the cost of home insurance. This includes burglar alarms, smoke alarms, approved locks on doors and windows, and membership of Neighbourhood Watch scheme. Taking both buildings and contents cover with the same company usually comes at a discount.
If you're not likely to take more than one holiday this year, take out single trip travel insurance rather than an annual policy. Financial researchers Defaqto found a single trip policy can be 147% cheaper than an annual policy. The cheapest cover on this site for someone going to Europe for a week is £4.37 and £7.95 for a family with cancellation and baggage cover.
You can remove the baggage element if you have cover for personal possessions taken away from home on your home contents insurance.
And don't forget to get a European health card, the EHIC, as insurers often waive the excess on any medical claim if you have this. In some circumstances, it may bring down the cost of the entire policy as medical expenses account for the largest claims. The EHIC, available in post offices and also online at ehic.org, entitles all European Economic Area residents to any necessary and emergency state-provided medical treatment in any EEA country.
Finally, if you can't afford the annual premium, look for insurers who don't charge interest on your monthly premiums, otherwise you can pay as much as 40% in interest.