Westfield Health will absorb January's 1% insurance premium tax (IPT) rise instead of passing it on to policyholders.
The decision will cost the health insurer an additional £530,000 per year and it is the first health insurer to announce plans to do so.
Jill Davies, chief executive of Westfield Health, called the tax increase "unwelcome" and said the provider wanted to reassure all its customers, whether companies or individuals, that it will not be increasing prices immediately on implementation.
"However, in future reviews of plans, we will have to build any increase in the prevailing rate of IPT in our premium calculations," she says.
"Although it was disappointing to hear of the 1% IPT increase from 5% to 6%, some areas of the insurance industry breathed a sigh of relief as there had been fears that the increase could be much greater.
"Westfield intends to lobby the Government to ensure they are aware of our concerns about any future possible IPT increases. It does not seem to make any sense to use IPT to raise taxes as this penalises the vast majority of people who are buying a healthcare plan to protect themselves and their families," she adds.
IPT is collected on sales of insurance as a percentage of the premiums consumers and businesses pay.
The 1% increase was announced in Chancellor George Osbourne's first budget in June and is expected to hand the Treasury an extra £500m per year.
However, it will still leave the UK with one of the lowest insurance premium tax rates in Europe, where the average is about 1%.
