PART OF PPI COMPENSATION IS TAXABLE
Thousands of people every week are now getting a cheque from a bank or loan
company to compensate them for mis-sold payment protection insurance. But most
of them do not realise that the taxman will want a cut.
The payment is in two parts. First, you will get your premiums refunded right
back to the time when you were first mis-sold the product. That part of the
payment – which just gives you back your own money – is of course tax-free.
Second, you will get interest on the premiums at the generous rate of 8%.
This part of the payment is taxable and if you are a taxpayer this tax
year then you will have to pay tax on it.
One bank – RBS (including NatWest) – and all smaller loan providers which are
not banks – including FirstPlus (part of Barclays) and Black Horse (part of
Lloyds) – will have already deducted tax from the interest at the basic rate of
20%. If you are not a taxpayer this year then you can claim back this
pre-deducted tax. If you are a basic rate taxpayer then you do not have to worry
– the tax has been paid. Higher rate taxpayers will have to pay another 20% on
the gross amount. That can be declared on a self-assessment form. But those who
do not fill one in have to inform their tax office about the payment. The tax
due will be collected through your 2012/13 tax coding.
At least four major banks are not deducting the tax at source before making the
payment. They are Lloyds (including Halifax and Bank of Scotland), Cooperative
Bank, HSBC, and Barclays (including Barclaycard). If you pay tax this year you
are obliged to inform HM Revenue & Customs about the payment. The tax will then
be collected by reducing your tax code in 2012/13.
Because the premium refunds can go back many years the proportion of your
payment which is taxable can be high. One example shows a total payment of
£1700, stretching back to 2003. Of that sum £500 was interest and so £100 of
basic rate tax is due. Any tax due is calculated in the year the payment is
received; it does not matter if you paid tax in previous years.
The letter from the bank or lender should set out how much of the money is
return of premiums and how much is interest. If tax is due send a copy of this
letter to your tax office. If you want to claim a refund print off form R40 from
the HMRC website.
http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=pf-A5D0R72E&formId=818
You have until 5 April 2016 to reclaim tax deducted in this tax year.
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