Tax due on interest payments on PPI claims, says HMRC

Consumers who have received a PPI refund may be liable to tax on the interest element

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Saturday, 12 November 2011 10:51

Members of the public who have successfully claimed back money through payment protection insurance (PPI) claims are likely to have to pay tax on the interest element added to their payout.

The Financial Services Authority (FSA) won a judicial review against the banks to force them to repay customers missold PPI. Lloyds Banking Group decided not to contest the legal verdict and other banks involved followed their lead enabling millions of customers to claim refunds.

Now it emerges that customers who were granted an interest payment of eight per cent on the funds owed to them will be liable to tax on the interest element.

A spokesman for HM Revenue & Customs told BBC Radio 4’s Money Box programme that although no tax is liable on the repayment element of compensation paid to customers missold PPI, it is due on the interest. This is because had that money not been used to pay for PPI, it would have been taxable had it been invested in an interest-bearing savings account.

Some of the banks and financial institutions who sold the PPI policies in the first place may have deducted the taxable element at source leaving claimants with no liability.

However, this will not be the case in all circumstances. Claimants are advised to check with the PPI provider if tax was deducted at source or not.

The banks have been informing customers who have received refunds that they need to write to HMRC themselves to check whether any tax is die on the interest payments.

Barclays, Lloyds, HSBC and the Co-operative Bank have all said that they have not deducted the tax at source but NatWest has said that it will do so.

Customers who paid for PPI on their credit card will not have received interest automatically. They would only receive the eight per cent payment if the value of their refund would have left them with a credit balance. Loan companies are required to deduct the tax before making a repayment.

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Tax due on interest payments on PPI claims, says HMRC

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