Millions of households could be hit with a second swingeing rise in the tax paid on insurance premiums, it emerged last night. George Osborne is considering increasing Insurance Premium Tax in the Budget on Wednesday, sources said. It would be the second increase in under a year, after a 50 per cent rise in July last year. The tax hike would raise billions for the Treasury, but see families facing increases in their premiums for car, home and pet and medical insurance. Astonishingly, a Treasury minister has claimed IPT is ‘not a tax on consumers but on insurance companies’.

Economic Secretary Harriett Baldwin made the claim in a letter to the AA at the time of the last hike in IPT last year, the insurance group said. Last night the proposed hike led to accusations the Chancellor was treating motorists like ‘wallets on wheels’. Recent weeks has seen speculation Mr Osborne could take advantage of historically low oil prices and increase fuel duty. But this has sparked a furious backlash from Tory MPs and fuel campaigners. Insurance groups fear Mr Osborne could instead opt for a ‘stealth’ levy on 50 million insurance policies.

In Germany and other European countries, IPT is paid at the same rate as VAT. In this country that would mean a tax of 20 per cent. Unlike other products, consumers are required to have car insurance. Increasing tax on other, voluntary forms of insurance is controversial because it discourages the public from protecting themselves against disaster. It is especially controversial in the wake of recent flooding which saw hundreds of millions of pounds of damage done to homes.

The Association of British Insurers said the increase from last year’s Budget could put £100 on the cost of insurance for a family with two cars, combined contents and building cover, pet and medical insurance. ABI estimates suggest the hike would see £42 added to average private medical insurance cover, £13 to the average comprehensive motor insurance policy, £10 to combined building and contents cover and £10 to the average pet insurance policy.

James Dalton, director of General Insurance Policy at the ABI said: ‘Insurance Premium Tax penalises the millions of people and businesses throughout the UK who do the right thing by taking out insurance to protect themselves against life’s expensive uncertainties.

‘At a time when personal injury costs are pushing up average motor insurance premiums, a further hike in IPT is the last thing the UK’s hard pressed motorists need.

‘And with the Government keen to encourage less reliance on the state, any move that raises the cost of private medical insurance would be counter-productive.’

‘The UK insurance market is highly competitive, but affordable insurance cannot be taken for granted.

‘IPT should not be seen as a soft touch by the Chancellor, as further increases will hit people in the pocket hard, or even worse could see people starting to reduce or drop their cover altogether.’

The levy, which is paid on a raft of insurance policies, including car, home contents, pet and medical cover, was put up 50 per cent in last year’s Budget. That increase, which came into force on November 1 last year, saw it rise from six per cent to 9.5 per cent. That is expected to raise £8billion for the Exchequer over five years. It was the biggest single revenue raiser in last year’s Budget.

A second rise, increasing the levy to 12.5 per cent, is understood to be under discussion in the Treasury. The AA said the two increases would push the cost of the average motor insurance policy up by nearly £40, or £80 for younger drivers.

Edmund King, the AA president, said Miss Baldwin’s comment was like saying ‘fuel duty is not a tax on drivers but on petrol stations’.

He added: ‘It’s ridiculous that the insurance industry is singled out in this way.

‘If the chancellor decides to hit drivers again we will do all in our power to show our members and customers exactly how much the government is taking from them.

‘Drivers are not wallets on wheels but appear to be treated that way by the Treasury. Car insurance is not a luxury but a legal necessity so should not be taxed like a luxury.’

There are fears the increase could lead to an increase in the number of uninsured drivers. Despite government action against insurance scams, premiums are still going up.  Figures suggest average premiums rose more than £100 over four months. The average cost of insurance went up almost 17 per cent between last summer and the end of last year.