Payment Protection Insurance (PPI) was designed to cover your loan or credit card payments for a year in the event that you fell sick, had an accident or became unemployed. The problem was the policy was mis-sold by the banks as thousands of customers who took out the insurance either didn't need it and failed to realise this, were forced to take the policy as part of the product they were purchasing, or they were automatically excluded from the potential benefits for various reasons including being self-employed.
People were potentially paying hundreds of additional pounds on loans for worthless cover. You can view a PPI mis-selling checklist here. The result has been a series of PPI refunds and compensation however, this could have tax implications for those who have received it.
The issues of mis-selling were identified and generally traced back to the 1990's. Some have even been before that. The amount paid for loan PPI was between 15% and 30%. This meant loan reclaims have in many cases amounted to thousands of pounds. Many who have complained to their banks have received refunds of the PPI premiums they paid and possible repayment of the interest on the loan where the PPI premiums were added to the loan. This has been with 8% interest then added to the total refunded amount.
It is the 8% interest on the total refund paid that is the key part here as that is subject to income tax. The devil is then in the detail because you need to check how exactly the banks have paid you. Some lenders have paid the 8% interest net of basic rate tax while other lenders have paid the interest gross and not made any tax deductions. In other cases banks have set the refund of the PPI premiums and interest against the loan balance still outstanding.
First and foremost check the date you received your PPI compensation payment. Your bank/lender should have sent you a letter detailing all of this. The reason being the rules for banks and building societies changed from 01/10/2013 and 01/09/2013 respectively. Interest on PPI compensation on or after that time should have basic rate tax deducted at source. If however, you received compensation payments before those dates then you need to declare the taxable interest to HM Revenue & Customs (HMRC). To do this, follow these steps:
The content of this post is up to date and relevant as at 05/01/2015.
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