Tax blow will push up your premiums: Nic Cicutti explains the new premium tax which from today will affect a wide range of insurance policies

MILLIONS of people face a new tax on a wide range of insurance policies from today.

The insurance premium tax, announced in last November's Budget, will add 2.5 per cent to many premiums.

These include car and home insurance, travel policies, private medical cover, warranties on electrical goods, mortgage indemnity, personal liability and accident cover and even membership of motoring organisations.

Some insurers are pledging not to pass the increase in costs on to their policyholders straight away.

Prudential has announced that it will absorb the tax until at least October next year at a cost of pounds 8m.

Eileen O'Brien, Prudential's insurance marketing manager, said: 'The extra cost to our policyholders is nil. This will not only include our existing 2.2 million home insurance customers, but new policyholders as well.'

But the Labour Party claims that growing numbers of people in high crime areas could abandon home insurance cover as the new tax will add to already escalating costs.

Harriet Harman, shadow Treasury minister, said the combined insurance bill for the average family - at pounds 556 already 20 per cent higher in real terms than five years ago - would rise by a further pounds 13.90 under the new tax.

The AA said recent cuts in premium rates on motor insurance meant that the effect of the new premium tax would not be as severe.

'The effect of insurance premium tax is clearly disguised by falling premiums,' the association said. 'There must be a danger that the Chancellor will seek to recoup lost revenue by further increases in the next Budget.'

One of the areas to be taxed is mortgage protection cover in the event of redundancy.

This is one aspect that the Government is keen on promoting as it cuts homeowners' entitlement to mortgage benefits.

Policyholders renewing or taking out cover before today may have been able to avoid the extra tax for a while. But most policies are written for a year at a time and will incur the new charge as soon as they are renewed.

There will be some exemptions. Kathy Byrne, an actuary with Pinnacle Insurance, a company specialising in redundancy cover, said: 'Some transitional arrangements have been agreed with Customs and Excise, which is responsible for the tax.

'Although the final details have still to be confirmed, we believe that as long as premiums were taken out before 1 October and are written on a regular premium basis they will not be subject to the tax.

'For example, if a person took out redundancy cover on a 10-year loan it will not be subject to insurance premium tax.'

Ms Bryant added that an alteration to the policy would make it liable to tax. This includes changes such as single to joint cover or vice versa or a further advance taken on a loan.

If a contract has a renewability clause after a few years, liability will be triggered at renewal.

Some policies, such as mortgage protection cover or credit card insurance, which have monthly renewable contracts, will be subject to the tax on all premiums after this month.

Ms Bryant advised checking with the insurer or a broker to see whether this is the case.

(Photograph omitted)