We are all familiar with VAT as a tax on our spending. The model is simple: the more we spend, the more VAT we pay.
The vast majority of us are less familiar with Insurance Premium Tax or IPT, a levy added to the total price of our insurance policies - from car, home and health insurance to breakdown cover.
When IPT was first introduced in 1994, the rate stood at 2.5%. A flurry of hikes has seen this rate increase dramatically, with the Chancellor's 2016 Autumn Statement ringing in the third IPT rise in the last 18 months alone. From next June IPT will stand at 12% - double what is was this time last year.
This has implications for all of us. The ABI's Quarterly Motor Insurance Premium Tracker for the third quarter of 2016 showed that the average price paid for comprehensive insurance was £440, a rise of 9% compared to the same period last year, adding an extra £38 to the average price paid for comprehensive cover. Part of this increase is attributable to the steady rise in IPT.
However, the Chancellor's move sees younger drivers being disproportionately penalised on top of their already soaring insurance premiums.
Unlike VAT - which is based on our spending behaviour - IPT does not take account of our driving behaviour - namely how often, how far, or how safely we drive.
Since younger drivers tend to have the most expensive premiums, they also pay the most IPT. Young motorists often face premiums above £1,300 and this latest IPT hike is likely to add more than 10% to the cost of their motor insurance. In short, the people who will be hit hardest by IPT are the people who can afford it least.
The fact remains, however, that younger drivers have a much higher risk of crashing than older drivers. Department for Transport stats show that those aged 17-19 make up just 1.5% of UK licence holders, but are involved in 9% of fatal and serious crashes where they are the driver. But rather than being indiscriminately taxed, new drivers need to be educated and informed about their driving behaviour, both for their own safety and that of other road users.
Technology offers us a way forward, both to manage IPT hikes and to increase road safety, with telematics tech having a particularly notable impact.
Telematics devices gather comprehensive real-time driving data through advanced GPS, accelerometer and gyroscope technologies. Data is collected on everything - from the duration of a drive, distance and location to road type, braking and cornering - to revolutionise not only the economics, but also the behavioural science of driving.
The change does not come from the numbers themselves, but from making sense of the data, which provides insights into driver behaviour, and in turn allows both drivers and insurers to take action. Just like a health app on a smartphone, getting instant feedback on your driving can provide powerful nudges to change behaviour - for example, to drive more carefully and economically.
British Insurance Brokers' Association (BIBA) member research shows us there is a 40% drop in crash risk for new drivers that use a telematics device. Added to this, telematics has been shown to afford average savings of 20% for consumers, which would in turn alleviate the price impact caused by IPT.
IPT relief for telematics policies would go even further than this, directly encouraging insurance products that reward good driving to make our roads safer places to be. It is crucial that Government recognises the transformational potential of technology to address safety, while also alleviating the currently disproportionate tax burden on young drivers.