No I will not. As I have just stated, the president of the AA, Edmund King, has said of the Budget:
“The sting is in the tail.”
It is fine to make improvements that help the motorist, but the sting is in the tail and he has made the point that this is an outrageous hike. I ask the hon. Gentleman to reflect on the impact on young motorists and the possible increase in the number of uninsured drivers. If that were the result of this hike, it would be a very dangerous development.
The chief executive officer of the British Insurance Brokers Association, Steve White, has also raised concerns about the impact of the tax on insurance policies and on the industry. He makes this important point:
“Those hit by this stealth tax will include the 20.1 million households with contents insurance, 19.6 million with motor insurance and 17 million with buildings insurance. The Government has been working with the industry to reduce the cost of insurance for consumers…It therefore seems counterintuitive to be taking measures which will add to the cost—effectively taxing protection.”
Let us be clear about what is going on. This is a tax on the protection that families need.
The Financial Secretary to the Treasury, who is now in his place, has made clear in the past his views on the impact of increases to this tax. In 2010, he said of the smaller rise that was introduced at the time:
“I am not denying that we expect the increase to be passed on predominantly to consumers; we expect that the bulk of it will be.”—[Official Report, 15 July 2010; Vol. 513, c. 1130.]
Indeed, some of the UK’s biggest insurers, including Aviva and RSA, have already confirmed that they are planning to pass on the cost to consumers.
We need to be clearer about which groups will be affected by this increase and what impact it will have. Car insurance and home contents insurance policies will clearly be affected. Of course we welcome the assurances that the Government have given about preventing a rise in VAT, income tax and national insurance, but families in the UK will still be hit by these changes to the insurance premium tax. This tax increase on families comes in addition to other Budget measures that will hit families, such as cuts to tax credits. We must always keep in mind the cumulative impact on families of all the Government’s policies.
Hon. Members have asked what else we would do. The tax rise is also contrary to what the Chancellor promised before the election. He said that
“tax increases are not required to achieve”—
further consolidation, and that this
“can be achieved with spending reductions”.
So the Chancellor did not foresee these measures. Despite his claim, however, he has chosen to deliver a Budget that increases taxes as well as placing a significant squeeze on public finances and services. The average household is likely to be affected by these changes in multiple ways. Many families purchase more than one type of insurance, which means that they will have to pay this tax increase more than once.
We must also consider the effect of the policy on different groups. People’s insurance needs differ depending on their age and income and on whether they own their home. Those who have high premiums are more likely to be adversely affected by this increase to the taxation rate. The groups that I single out are young motorists,
homeowners and some businesses. For example, insurers have estimated that the average cost of a year’s cover for drivers under 25 will jump by around £50. The British Insurance Brokers Association has stated that
“a young driver or an experienced driver in an inner city area would see the amount of tax on an annual car insurance premium of £1,500 increase from £90 to £142.50”.
Young motorists already pay the highest premiums, with the average policy for someone who is under 25 already costing more than £1,200 a year. For a young apprentice, jobseeker or student, the increase could make the difference between being able to afford insurance so that they can travel to work for their first job and not being able to do so. Young people are already having their eligibility removed for housing benefit, jobseeker’s allowance and the new minimum wage, and this is just another financial burden that the Government are placing on them.
Another group facing higher insurance premiums are people who have become unemployed. A BBC report in 2012 showed that those without a job are generally asked to pay more for motor insurance cover than those in full-time employment. BBC research with three different brokers found that car insurance premiums averaged almost a third more—30%—for those out of work, but that the cost could be as much as 63% higher. People who are out of work already face many challenges: looking for a job; finding the money to pay their rent or mortgage; and finding the money to feed their families and run their homes. Insurance premiums are higher than regular premiums, so this increase is just another blow to people who are struggling to find work.
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We must also consider the impact this policy will have on businesses, as corporate insurance premiums will also be affected by this increase. Although large companies might be able to absorb it, concerns remain about how small and medium-sized businesses will be affected by the extra cost. Will the Minister therefore tell me what assessment has been made of the impact of the tax rise on the take-up of insurance by business?
The insurance industry is also under a significant amount of pressure to implement the changes needed for this tax increase, which will apply from 1 November 2015. The Association of British Insurers has stated:
“Firms had no advance warning of the increase in Insurance Premium Tax announced in the Budget, meaning preparations for the implementation date of 1 November have placed sudden pressure on IT and back-office services.”
The Government’s failure to foresee this difficulty suggests the need for a more thorough assessment of similar tax increases in future and a consideration of whether industries can implement changes in such a short period of time.
The rise in insurance premium tax may also put extra pressure on insurance companies, given their other obligations. We have already touched on the Flood Re scheme, which was introduced in 2011 as a mechanism to protect households at risk of flooding from high insurance premiums. In 2013, as part of the Flood Re scheme, the ABI and the Government agreed to a cap on flooding insurance premiums in order to ensure that affordable home insurance was made available to those most likely to need it in the event of a flood. The Flood Re pool has two sources of income: the flood element
of the policies passed into it; and an additional levy on the industry. Although the amount of money the levy needs to raise each year is fixed, if insurance companies start to see a significant decrease in profits because of the rise in insurance premium tax, they may consider passing on more of the cost of this levy to policyholders, again meaning a steeper increase in their premiums. My hon. Friend the Member for Kingston upon Hull North (Diana Johnson) has already raised the issue of households outside the Flood Re scheme suffering higher premiums. Once again, those with the highest premiums could suffer the most, particularly if those with lower risks decide to forgo insurance altogether.
Her Majesty’s Revenue and Customs’ policy paper reports that the mechanism for monitoring and evaluating the policy will be through
“information collected from tax returns and receipts”.
We believe there is a need for more in-depth analysis and understanding of exactly who will be affected by the increase and the impact this will have on the take-up of insurance. Concerns have been raised that the increase in the insurance premium tax rate could create perverse incentives and market distortions, meaning that fewer people take up the correct level of insurance to cover them against certain risks and liabilities. Clearly, insurance is a vital tool that helps people plan for risks in their lives. We should be encouraging people to take out policies that suit their needs and encouraging the insurance industry to offer competitive and affordable policies—it seems the Government were concerned about that but their concern has now ended.
We believe that vehicle insurance is of the greatest importance, because drivers are legally required to insure their vehicles if they want to drive in the UK. The legal minimum of third-party insurance covers drivers if they have an accident causing damage or injury to any other person, vehicle, animal or property. It is right that the UK law encourages drivers to take that responsibility. When fines for driving uninsured are becoming a fraction of the costs of insurance, higher premiums could lead to more uninsured drivers, and there is a real fear about that in the industry. Young drivers already face premiums of more than £1,200, and that will increase with this tax increase, so a fixed penalty which can be only £300 and six penalty points could be seen increasingly as a risk that people are—wrongly—prepared to take.