Chancellor George Osborne caught the insurance industry by surprise with a Budget announcement that insurance premium tax will rise a whopping 56% to 9.5% from November this year.

The reaction from the industry has been one of outrage given the pressure that the government has been applying to reduce premiums.

The estimated £1.6bn increase in revenue that this rise should deliver to the Treasury by 2020-21 can legitimately be passed on to our customers as it is an increase in tax. AA Insurance estimates that the IPT hike will add around £5 to the average home policy while tax experts at PwC believes that the cost of the average buildings and contents policy will rise by £12 as a result.

However a question mark hangs over whether insurers will absorb the cost themselves. It is an incredibly competitive market both in the commercial and personal lines sectors and margins are tighter than ever. In the current environment, this could lead to greater consolidation or some exiting from affected markets according to some industry commentators which would surely be to the detriment of the consumer if it led to less choice?

Any increase in cost could lead to customers cutting back on the level of cover they take out or even foregoing it altogether – a situation that no-one wants.

If insurers do choose to pass on the costs, what will this mean for your clients?

Policies incepted on or renewed on or after 1^st November 2015 will attract the new IPT rate of 9.5% regardless of when you actually provided the quote or any applicable rate guarantee. Any mid-term change which results in the payment of an additional premium will also attract the new rate as will any adjustment or cancellation which results in a refund of premium.

The existing IPT rate of 6% will apply to those policies incepted or renewed prior to 1^st November so long as the insurer has entered the premium on to their systems by the end of February next year. The new rate of IPT of 9.5% will apply to any mid-term changes that take place on or after 1^st November resulting in an additional premium however the old rate of 6% will apply to any changes that result in a refund.

It’s going to be a waiting game to see whether household insurers to choose to hike up premiums, become more selective in the risks they write or possibly exit some areas of business altogether.

It’s also going to be interesting to see whether the Chancellor chooses to weigh up the market reaction before deciding whether to push IPT up again in future budgets. Let’s face it, all taxes are reviewed regularly and as IPT hasn’t gone up since 2011, it could well be in his sights as a future revenue generator for the Treasury.  Some in the industry are speculating that he could look to bring it in line with VAT. As the average IPT rate in the EU is over 10% while in Germany it is as high as 19%, further increases could be argued away as bringing the UK in line with its European neighbours.

They do say that nothing is certain except for death and taxes don’t they?!

Kevin Paterson is managing director of Source Insurance