401 K plan is a retirement plan that is on offer in US and some other countries. This plan offers tax deferred savings to the employees and encourages them to save for retirement. It is also referred to as employer sponsored retirement plan.

A 401 K plan offers several tax deduction benefits to the employees. These benefits can be availed by all citizens (except in certain cases where the employer can impose certain restrictions). In cases of people with less than 1 year of service, non US citizens or part time workers, contributions to a 401 K plan depends upon the employer. For others the rules are common.

401 K plan offers tax deductions to the contributors. Under this plan all the contributions are tax deductible, that is, tax is not levied on the contributions. Even though contributions are made from non taxed salary, it is not entirely exempted from taxation. The funds (or tax deductions) are taxed at prevalent rates at the time of withdrawal. Therefore the savings are only tax deferred and not tax exempted.

401 K funds (or the tax deductions) are generally monitored by a third party. The annual contributions can be invested in a variety of stocks, funds, certificates and bonds. But it is up to the employer to provide these options to his/her employees. He has the sole discretionary power over the management of 401 K plan. The contributions to the plan can be matched by the employer also. He/she can contribute to the 401 K plan of his/her employees. This is generally done by the employers to retain the employees. Employer contributions are not included in the maximum limit on annual contributions of employees. Therefore they are over and above the salary of an employee.

The employer can provide the option of buying company stocks from these annual contributions. But investing the entire in amount in a single companies stocks, specially the one in which one is working, is not advisable. This would mean unnecessary risk and therefore should be avoided.

Usually this plan is offered by big companies only. This is because of the enormous costs involved in the administration of the plan. However, simpler options are available for self employed and former government entities also.

The maximum tax deductions possible are limited and set by the government. The employer can also impose his/her own limits for maximum employee contribution (or tax deductions). For example a firm may restrict the maximum contribution to 10% of the employees income. The governmental limit on maximum contribution generally depends on the inflation rate and varies every year. For people over 50 years of age, catch up limits are allowed. This allows people over 50 years to contribute more than others. For the year 2007, the maximum contribution limit for people below 50 years of age was $15,000. For people above 50 years of age this limit was set at $15,500.

In many countries you have to pay a range of taxes on all services and products. What you may not be aware of though, is that your car insurance is also subject to the same taxation.

Value added tax, better known as VAT, is one of the most recognisable taxes. This is applied to almost all products, apart from hand-picked essentials. Unfortunately for all drivers, car insurance is certainly not exempt.

This has seen many policy holders have to pay significantly more in the past year or so, particularly in the UK where the rate of VAT has increased from 17.5% TO 20%. Whilst in percentage terms this is a minimal jump, when you’re already paying hundreds if not thousands for a policy for your vehicle, this can have a huge impact.

The second form of tax that is commonly applied to car insurance is the Insurance Premium Tax.

This doesn’t include a lot of long-term forms of cover, but for most drivers there is a 6% levy applied to all policies. Again, this isn’t a huge amount, but when added to the VAT and other calculations that go into a quote, it can make a big difference.

Insurance Premium Tax is another area where there have been quiet increases in the recent past. Unsurprisingly it probably slipped under the radar of most, but in the UK it was increased from 5% in 2010 to 6% in 2011. This has added another few pounds to the running costs of a vehicle and has seen many premiums remain reasonably flat this year, with insurers having to pass on the costs to customers.

In the most part, these taxes are absorbed within the policy, which is why many drivers simply aren’t aware that they exist. Any costs are applied to quotes after the initial risk assessment is carried out. Therefore when you apply and fill in all of your details and those of your vehicle, the insurer in question will approximate the cost based on these factors and their own algorithm.

The higher your supposed risk, the more you will be quoted. The knock on effect of this can be quite substantial, particularly in light of the aforementioned taxes and their respective increases. This is why it is important that all drivers are careful to preserve their no claims bonus and look to avoid unnecessary risk – such as parking on a street rather than on a secured driveway.  

Taxes are an unavoidable part of life and most countries will have their own policy when it comes to applying them to car insurance. Therefore levels of taxation and the amount insurers charge is likely to vary quite considerably from province to province. VAT for instance is highly variable, with many governments imposing levels either side of the United Kingdom’s current rate of 20%.

They are all subject to change of course. Perhaps not as frequently as your fuel duty, but as annual budgets roll around, so too does the possibility of an increase in your car insurance policy and the taxes therein. This is out of the hands of insurers of course, with their only input being how much the basic cost of a policy is, just like any other product or service.

So, to briefly summarise, the two main taxes that are applied to all car insurance policies in the UK are Insurance Premium Tax and Value Added Tax. The former of these is around 6%, whilst the latter currently sits at 20%. Both are variable and have seen significant changes within the last year or so.