This piece first appeared in the money section of the Saga website on 23 November 2011
The text here may not be identical to the published text

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.

 


Go back to Saga Web

Go back to Saga Magazine

Go back to archive front page

Go back to Paul Lewis front page  


All material on these pages is © Paul Lewis 2011