Gabelle Tax Analysis: Tax on PPI compensation payments
HMRC has confirmed – in guidance published on 10 May – that tax will not be charged on Payment Protection Insurance (PPI) compensation payments, but will on any interest element.
Last year the press reported that £1.9 billion was paid out to victims of mis-sold PPI. It is expected that a further £5 billion will be paid out. The average claim is said to be worth £3,000. PPI was sold to borrowers to cover their loan repayments in the event of illness and redundancy. It was highly controversial as in many cases it was sold to the borrowers without their knowledge and often sold to individuals who were ineligible to make a claim.
In many instances the interest element can be greater than the compensation itself, so it is important to be able to identify the components of any compensation received.
The guidance confirms that:
- the compensation is usually not taxable (on the basis that it is fundamentally a repayment of premiums), but
- any interest will be taxable (which would have accrued had the individual never made the PPI payment).
If interest is received from a bank income tax would not be subject to deduction of tax at source, although interest received from other companies, including non-banking members of banking groups would be subject to a deduction of basic rate income tax at source.
Credit will be available for any income tax deducted at source, and non-taxpayers will be able to claim an income tax refund.
Tax practitioners should consider the following where they have clients who have received PPI compensation:
- Non-tax payers who have had tax deducted at source may be entitled to a repayment of tax.
- Basic-rate tax payers who have had tax deducted at source do not need to do anything further unless they file a tax return. Basic-rate tax payers who have not had tax deducted at source will need to declare the interest to HMRC.
- Higher rate tax-payers will need to declare interest on their tax returns. Credit will be available if tax was withheld at source.