Emergency Budget

Short-term relief at the pumps but big increases on the horizon

extra duty and VAT will hit motorists in the future

22 June 2010

This budget brings short-term relief at the pumps but extra duty and VAT will hit motorists in the future. Motorists will be relieved that there is no immediate increase in duty at the petrol pumps but will have to prime themselves for a 1p increase in October and another 0.76p plus extra VAT in January. These increases will add an extra 4.6p to petrol prices already at record levels.

Edmund King, AA president, said: "Desperate times may need desperate measures but the AA does not want drivers to be left in dire straits – paying more but getting 'money for nothing' in terms of congested roads and more potholes.

"If the cost of fuel continues to rise then the Government should look again at their promise for a fair fuel price stabiliser. Already our AA Populus survey shows that 67% of drivers are cutting back on journeys, cutting back on other expenditure or both due to the high cost of fuel."

With fuel duty going up 1p a litre in October and another 0.76p a litre on 1 January, the VAT rise to 20% will on 4 January add £117.98p to the annual cost of fuel for a family with two petrol cars, on today's prices. This compares with an average annual increase in Band D council tax over the past 5 years of £45.

With petrol now averaging 118.3p a litre and diesel 120.75, the VAT rise and duty increases would push the pump price of petrol to a new record high of 122.93p a litre (previous record 121.61p on 12 May 2010) and diesel to 125.43.

Insurance Premium Tax

Insurance premium tax will increase to 6% (up from 5%) which will hit motoring and household insurance, as well as breakdown cover.

The standard rate will increase from 5% to 6%, while the higher rate (for Travel insurance) is set to match the rise in VAT from 17.5% to 20%. The changes take place from 4th January 2011.

Many commentators expected the rate to rise far more steeply, even doubling and last week, the AA warned Treasury Minister and officials of the consequences of a sharp rise in IPT, including a jump in the number of uninsured drivers.

King added: "Car insurance premiums are rising very quickly as insurers struggle to replenish reserves depleted by underwriting losses. I believe we will see premium increases of up to 20 per cent this year, for the second year running.

"My greatest concern was that a large increase in IPT would have led to large numbers of people attempting to drive their cars without insurance but even a 1% increase will make premiums unaffordable for some."

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22 June 2010