Chancellor George Osborne has announced that insurance premium tax (IPT) will increase by 0.5% to a rate of 10%.
This is the second increase to IPT in less than nine months.
The change will come into effect from 1st October 2016, according to Budget documents.
Osborne said:"I am going to increase the standard rate of Insurance Premium Tax by just half a percentage point - and commit all the extra money we raise to flood defence spending.
"That's a £700 million boost to our resilience and flood defences."
To explain the initial increase, the Chancellor said this increase would bring the UK in line with the rest of Europe.
The industry had speculated prior to the 2016 Budget that IPT would increase to 12.5%.
Changes to IPT affected 3 million private medical insurance and cash plan policies but does not affect protection insurance.
The ABI estimated that the 1st November 2015 increase likely added more than £40 to average private medical insurance premiums. The combined increase will add £78 to policies on average.
AXA PPP previously described the increase as a "retrograde measure" to health and wellbeing.
Prior to the Budget announcement, James Dalton, director of general insurance policy at the ABI said: "Another increase in Insurance Premium Tax would be a raid on the responsible that laser targets those who do the right thing.
"It will hit those on low incomes and increase the risk that some people reduce their cover or stop insuring altogether."
Mike Stalley, chief executive of, FiscalReps said: "In the grand scheme of things the revenue generated from IPT is small; just under £3bn in the year 2014/15, out of a total government tax collection of £515bn; accounting for around half of one percent of all taxes collected by HMRC."
He also said: "Insurance premium tax is relatively easy to collect and enforce, and as this latest increase may add an additional £1bn to the overall tax revenues generated by HMRC, then it would appear to be an obvious move for the Chancellor to make.
"Although this does increase the rate standard of IPT to above the European average, consider this; insurance premium tax rates in Germany, Italy and the Netherlands and the higher rate of IPT in the UK are all significantly higher. There may still be more scope for future increases."
Further reading
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