In many countries you have to pay a range of taxes on all services and products. What you may not be aware of though, is that your car insurance is also subject to the same taxation.
Value added tax, better known as VAT, is one of the most recognisable taxes. This is applied to almost all products, apart from hand-picked essentials. Unfortunately for all drivers, car insurance is certainly not exempt.
This has seen many policy holders have to pay significantly more in the past year or so, particularly in the UK where the rate of VAT has increased from 17.5% TO 20%. Whilst in percentage terms this is a minimal jump, when you're already paying hundreds if not thousands for a policy for your vehicle, this can have a huge impact.
The second form of tax that is commonly applied to car insurance is the Insurance Premium Tax. This doesn't include a lot of long-term forms of cover, but for most drivers there is a 6% levy applied to all policies. Again, this isn't a huge amount, but when added to the VAT and other calculations that go into a quote, it can make a big difference.
Insurance Premium Tax is another area where there have been quiet increases in the recent past. Unsurprisingly it probably slipped under the radar of most, but in the UK it was increased from 5% in 2010 to 6% in 2011. This has added another few pounds to the running costs of a vehicle and has seen many premiums remain reasonably flat this year, with insurers having to pass on the costs to customers.
In the most part, these taxes are absorbed within the policy, which is why many drivers simply aren't aware that they exist. Any costs are applied to quotes after the initial risk assessment is carried out. Therefore when you apply and fill in all of your details and those of your vehicle, the insurer in question will approximate the cost based on these factors and their own algorithm.
The higher your supposed risk, the more you will be quoted. The knock on effect of this can be quite substantial, particularly in light of the aforementioned taxes and their respective increases. This is why it is important that all drivers are careful to preserve their no claims bonus and look to avoid unnecessary risk - such as parking on a street rather than on a secured driveway.
Taxes are an unavoidable part of life and most countries will have their own policy when it comes to applying them to car insurance. Therefore levels of taxation and the amount insurers charge is likely to vary quite considerably from province to province. VAT for instance is highly variable, with many governments imposing levels either side of the United Kingdom's current rate of 20%.
They are all subject to change of course. Perhaps not as frequently as your fuel duty, but as annual budgets roll around, so too does the possibility of an increase in your car insurance policy and the taxes therein. This is out of the hands of insurers of course, with their only input being how much the basic cost of a policy is, just like any other product or service.
So, to briefly summarise, the two main taxes that are applied to all car insurance policies in the UK are Insurance Premium Tax and Value Added Tax. The former of these is around 6%, whilst the latter currently sits at 20%. Both are variable and have seen significant changes within the last year or so.
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