The UK Government has raised insurance taxes as part of a £40 billion ($68 billion) financial austerity package unveiled in last week’s emergency budget.

The UK imposes a two-tiered tax rate for insurance – a standard rate and a higher rate charged on travel insurance and some vehicle and domestic covers.

Under the changes last week, the standard insurance premium tax rate moves to 6% from 5% while the higher rate moves to 20% from 17.5%.

The changes to insurance tax rates are effective from January 4 next year and are expected to deliver £500 million ($853 million) in additional annual revenue.

Total savings and tax hikes imposed by the new UK Government are expected to deliver £40 billion by 2015 in an attempt to arrest the UK’s massive public debt burden.

Long-tail covers are typically exempt from the tax alongside reinsurance, marine and aviation cover and international transit insurance. Premiums for risks located outside the UK also avoid the charge.

But the average British household will pay an extra £7.99 ($13.64) a year with premiums moving from an average £839 ($1432) to £846.99 ($1446), according to the Association of British Insurers.

The British Insurance Brokers’ Association (BIBA) says the tax increase may encourage consumers to underinsure.

“The last thing people need in a financial crisis is a higher insurance bill,” CEO Eric Galbraith said.