Britain raises insurance premium tax to 10 pct

(Adds detail, industry reaction)

LONDON, March 16 (Reuters) - Britain's finance minister George Osborne said on Wednesday he would raise the tax on motor and home insurance premiums by 0.5 percentage points to 10 percent to fund flood defences, boosting insurance shares as the rise was smaller than anticipated.

The tax hike follows a 3.5 percentage point rise in insurance premium tax last year.

"I am going to increase the standard rate of Insurance Premium Tax by just half a percentage point - and commit all the extra money we raise to flood defence spending," Osborne said in the annual budget speech.

Roadside recovery firm the AA said the latest tax hike was smaller than the 3 percentage point rise it had expected.

Insurers passed the previous tax rise onto customers, contributing to an 8 percent rise in motor insurance premiums in 2015. But further tax rises were seen as more difficult to pass on.

Motor insurers Admiral and Direct Line were up 0.4 percent and 2.2 percent respectively at 1533 GMT.

"While a further increase in insurance premium tax could be an additional increase to household finances, we are pleased that the government has committed to use the spend on flood defences," Direct Line chief executive Paul Geddes said in a statement.

The tax hike will allow an increase in flood defence spending of more than 700 million pounds ($985.88 million) by 2020-21, the Treasury said in the accompanying budget statement.

Severe flooding in Britain in December and early January is expected to lead to 1.3 billion pounds in insurance pay-outs, according to the Association of British Insurers. ($1 = 0.7100 pounds) (Reporting by Carolyn Cohn and Noor Zainab Hussain, editing by Sinead Cruise and Jon Boyle)