Payment protection insurance – now there's tax on the interest
Interest on £6bn Payment Protection Insurance (PPI) claims payouts will be subject to tax
, earning the government many millions of pounds.
The Financial Services Authority awarded customers compensation plus 8% interest
on the money they originally spent on mis-sold payment protection insurance from banks. The banking sector has set aside £6bn to manage the claims.
A spokesman for HM Revenue & Customs (HMRC) said: "No tax is generally due on the repayment element of compensation paid to those mis-sold PPI
. However, the additional interest is taxable
, in line with other compensation claims."
HMRC added that "Nobody should be worse off, as had the customer not purchased PPI, but kept that money in an interest-bearing account, the interest received would have been taxable
. Customers should check with their PPI provider as to whether tax has been deducted at source."
RBS/Natwest said it will do this, while HSBC, Barclays, Lloyds and the Co-operative Bank have stated that they will not deduct tax at source. Loan companies are already obliged to deduct the tax.
Although banks have written to customers advising them to contact HMRC to discuss what tax is due, some customers are confused.
On the compensation she received from the Co-operative Bank, Vivienne Wachenje from Essex, said: "In the document they sent me they said that I would need to be paying £94.88 tax which I don't really understand. Customers were wrongly sold PPI
in the first place so why should we have to pay anything at all?"
Credit card customers only receive interest at 8% if the value of the PPI refund would have meant they were in credit.Bryan Nott of Simpson Millar LLP
said the news of the unexpected tax was the last thing claimants wanted to hear. "Hard-pressed customers have already had an uphill battle for compensation against mis-sold payment protection insurance. If HMRC now taxes the interest, it just adds another layer of confusion – not to mention making millions for the government."