Image copyright Getty Images Image caption A rise in the cost of insurance is one option for the chancellor

Millions of households could face an increase in insurance costs, following a warning that the chancellor may target premiums in next week's Budget.

The insurance industry has claimed that George Osborne is planning another increase in Insurance Premium Tax (IPT).

The tax was raised from 6% to 9.5% in November 2015.

The Treasury said it would not comment on speculation about the Budget, which takes place on Wednesday.

The AA said that a further increase, to 12.5%, would mean that the tax could be doubled in less than six months.

Such a rise would add £37 a year to the average car insurance premium, it said.

IPT is charged on motor, home, pet and medical insurance, as well as car breakdown cover.

Travel insurance, and insurance on some electrical products, attracts the higher rate of 20%.

Budget options

Edmund King, the president of the AA, said it was ridiculous that the insurance industry might be singled out.

"Treasury minister Harriett Baldwin MP told us in a letter, 'IPT is not a tax on consumers but on insurance companies,' which is like saying fuel duty is not a tax on drivers but on petrol stations," he said.

The British Insurance Brokers' Association (Biba) said a rise in IPT would discourage customers from taking out policies.

The cost of motor policies rose more than 20% last year, according to the AA - partly as a result of November's rise in IPT.

However, many premiums have fallen over the longer term, making the tax a relatively easy target for the chancellor.

An increase in IPT could raise as much as £1.3bn for the Treasury in the first year.

George Osborne has already rejected plans to scale back tax relief on pension contributions - a change that could have netted the government up to £7bn a year.

Another alternative - raising fuel duty - has proved unpopular with some Tory MPs.