UK raises insurance premiums to cover flood-hit areas

The UK Chancellor yesterday raised insurance premium tax (IPT) by 0.5% and stated that the money raised should be used in flood-damaged towns. Last November, the rate was also raised from 6% to 9.5%. A leaked document recently suggested that government cuts might be putting an increased number of households at risk from flooding.The IPT is levied on all general insurance policies. The treasury claimed that, if passed on to customers, the average home and contents policy would increase by £1 and the average motor insurance policy by £2 per year.  According to the Association of British Insurers, last November’s increase added £14 to average motor policies and £10 to home contents cover.

The UK regions hit by the winter floods are set to benefit from an extra £700m to boost flood defences, after the chancellor announced another rise in insurance premium tax and earmarked the cash raised to flood-damaged towns.

George Osborne said he would hike the standard rate of IPT by half a percentage point to 10%, and use the proceeds to top up a fund designed to prevent repeats of the carnage that afflicted communities in the north of England and Scotland over the winter. It is the second time in recent months the chancellor has increased IPT. In November it was hiked from 6% to 9.5%.

The new increase follows criticisms of the government’s flood policy and a leaked document submitted to ministers that suggested government cuts might be putting an increased number of households at significant risk of flooding.

The Treasury’s red book stated: “On top of the government’s £2.3bn capital programme, which will invest in over 1,500 flood defence schemes across the country, Budget 2016 announces an additional boost to spending on flood defence and resilience of over £700m by 2020-21.

“The government will increase maintenance expenditure in England by £40m per year, and deliver even more flood defence schemes – including investing over £150m in Leeds, York, Calder Valley, Carlisle and wider Cumbria.”

Sarah Lakin, whose York cafe was flooded on Boxing Day, causing £7,000 of damage, said the nod to her city was welcome.

“We’ve been hit as a tourist destination by negative perceptions that we are all under water,” said Lakin, who runs the Fossgate Social with her brother Mike.

However, she added that beyond money for flood defences she would have liked to see more from the chancellor on pollution-cutting measures.

“You can’t fight nature, it’s King Canute isn’t it?” she said. “I think we have to assume more extreme weather is going to happen. I’d like to see us looking at the bigger trend and ask why we have more flooding rather than just putting up more and more walls.”

The insurance premium tax is levied on all general insurance policies, including all home and car insurance. The treasury said that if insurers pass the cost of the rise on to customers, the average combined home and contents insurance policy would increase by £1, and the average motor insurance premium by £2 per year. According to the Association of British Insurers, last November’s rate hike added £14 to an average motor policy and £10 to the cost of home contents cover.

Chas Roy-Chowdhury, the head of taxation at the Association of Chartered Certified Accountants, said: “The chancellor is very fond of a stealth tax, they tend to be slipped in quietly, the rise in insurance premium tax of 0.5% was ushered in under the guise of flood defences and will affect anyone who has home or car insurance wherever they live.”

The rise was welcomed by the insurance industry, which had feared the chancellor would increase the tax to 12%. Amanda Blanc, UK chief executive of AXA General Insurance, said: “There is some solace in the fact that the increase is not as extreme as feared and that the chancellor has promised to use the money raised to invest in flood defences.”