AA Insurance has warned the government that increasing Insurance Premium Tax (IPT) in the Budget on Tuesday (22) could lead to a sharp increase in the number of uninsured drivers on Britain's roads.

The warning comes amid speculation that the coalition government might double IPT, which is applied to car, home and all other insurance products sold in the UK, from its current 5% to 10%.

Edmund King, president of the AA, said that "while recognising that there is a 'gigantic hole' in public finances, taking the easy option of increasing IPT would disadvantage many of the most vulnerable in Britain.

"Car insurance premiums are under severe pressure as insurers struggle to recoup losses brought about by increasing fraud, personal injury claims and poor investment income.

"Last year, the average quoted Shoparound premium for a comprehensive car insurance policy rose by 22.6%, according to the AA's benchmark British Insurance Premium Index. We expect a similar increase this year," he points out.

King said that increasing IPT, even by 5 per cent, would pile more than £30 to the average Shoparound premium of £617 while increasing it to 17.5 per cent would increase that to nearly £700.

"Such an increase, added to the sharply rising cost of car insurance, could see more than 50 per cent added to the average family's car insurance bill in just two years," King adds.

It is young drivers and those on low incomes who would bear the brunt of the rises.

Young drivers already pay by far the highest car insurance premiums and it is now almost impossible for a 21-year-old man buying his first car to obtain insurance for under £1,000.

In addition, those on low incomes often live in high crime areas and keep their cars on the street or in public parking areas, both of which lead to higher-than-average insurance premiums.

The AA's fear is that increasing IPT will be the last straw for many people and that they will just not bother with insurance at all, which in turn, will put yet further pressure on the premiums paid by honest motorists. It can also lead to more hit-and-run casualties as the uninsured don't want to wait around to face the music.

An increase in IPT would also add to the home insurance burden and the AA points out that when families come under financial pressure, home insurance is one of the first things to be abandoned to help make ends meet.

The cost of roadside breakdown cover would also attract any increase in IPT and that could lead to cash-strapped motorists, who are already suffering record fuel prices, letting their cover lapse and risking big bills for recovery.

Factfile

IPT was introduced at a rate of 2.5% in October 1994 and doubled to 5% in 1997. A 'higher rate' of 17.5% was added to all travel insurance in August 1998.

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