The car insurance industry has reacted angrily to the rise in insurance premium tax (IPT) announced in this week's budget, accusing George Osborne of putting a tax on careful driving.

The lower rate lf IPT will rise from 5 to 6 per cent, while the higher rate – which applies to holiday insurance – will to up from 17.5 to 20 per cent. The rises will generate more than £455 million for the government in the first year.

Eric Galbraith, the chief executive of the British Insurance Brokers Association (Biba), derided it as a tax on protection, saying, "The last thing people need in a financial crisis is a higher insurance bill."

He explained, "Biba's research last year demonstrated that businesses and consumers were reducing insurance cover as a result of the recession and we are concerned that increases to insurance premiums as a result of IPT could lead to even further under-insurance or even a lack of insurance protection."

Some experts have said that the increases could have been much more, noting that British IPT remains low compared to European standards, where the tax is frequently equal to VAT.

Car insurance premiums have steadily risen during the last year, though that has started to tail off.

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