Chancellor George Osborne announced he will be raising insurance premium tax (IPT) by 0.5 per cent in his Budget speech today.
However, he also said that the money raised from the tax hike would go towards funding flood and storm defences.
IPT was increased from six to 9.5 per cent last November. The new rise will bring the rate to 10 per cent, which will apply from October 2016.
Today's tax increase is forecast to bring in £900m by tax year 2020-21.
"A further increase in IPT is disappointing news," said Huw Evans, director general of the Association of British Insurers. "Increased investment in flood defences is vital but should be part of core government expenditure, not an afterthought paid for by raising taxes on people and businesses who do the responsible thing in protecting themselves through insurance. We will be examining the detail closely to ensure the revenue raised is actually spent on new flood defence schemes."
Ben Flockton, insurance tax partner at PwC, added: "This latest rate rise will mean IPT will have increased by two thirds in less than a year. Overall, this equates to an additional IPT cost of over £17 on the average motor insurance premium and around £13 on buildings and contents policies. It remains to be seen the extent to which this is passed on through higher premiums."
Meanwhile, Adrian Smith, global head of IPT at KPMG, remarked that the rate rise announcement "will be worrying for insurers but could also mean individuals and businesses may fail to take out or renew essential, and often, compulsory insurances".