British motorists paid almost 9% more in insurance premium tax (IPT) last year, fuelling concerns that rising costs are making motor cover unaffordable for many drivers.
Research from the AA showed receipts from the standard rate of IPT on motor policies reached £692 million in 2024, an 8.6% increase on the previous year. The Treasury has applied the standard 12.0% rate to motor premiums since 2017, up sharply from the 2.5% rate introduced in 1994.
The AA has urged the government to ease the pressure by cutting IPT on motor policies by 25%, with a 50% reduction for newly qualified drivers. AA president Edmund King argued that the tax amounted to a penalty on responsible car ownership and warned that rising costs risked pushing low-income and younger motorists out of the market altogether. That, he said, increased the temptation for some to drive without insurance, a criminal offence that can lead to fines, licence points or disqualification.
The Association of British Insurers (ABI) echoed the criticism, calling IPT an “unfair levy” on those trying to protect themselves and their property. It has called for the tax to be frozen until conditions allow for a reduction.
Motor insurance prices have climbed steeply in recent years, with inflation in vehicle repair costs, spare parts, labour shortages and rising claims severity all driving up premiums.
ABI data showed that the average cost of cover hit £622 in 2024, a 15% rise on the year before, following a 25% increase between 2022 and 2023. Claims payouts rose by 17% in 2024, driven by factors such as vehicle theft, repair delays and fraud. Insurers stressed that wider reforms, including tackling car crime, fraud and recruitment shortages in repair services, were vital to easing long-term cost pressures.
Market analysts have noted that IPT exacerbates affordability challenges at a time when motor insurance is already under strain from cyclical underwriting losses. While the UK motor market saw some rate hardening in 2023 and 2024 to restore profitability, insurers warn that further taxation risks suppressing take-up of cover and widening the protection gap.
Early signs in 2025 point to a slight improvement, with average premiums in the first quarter down 7% compared with the same period a year earlier.
A Treasury spokesperson said IPT raised more than £8 billion a year for public services and represented only part of the cost of insurance. They added that a cross-government taskforce, launched in October with the Department for Transport, was assessing the rise in motor insurance costs. Its final report is due in the autumn.
