As predicted by Rebecca Benneyworth last week, the tax treatment of awards for mis-sold payment protection insurance (PPI) is causing trouble for accountants during self assessment season.
The actual rules HMRC applies are reasonably straightforward: if a taxpayer’s claim for compensation is upheld, they will get a refund of premiums paid, the interest they have paid on the premium if it was added to their loan, and simple interest at 8%.
While the principle is to return the claimant to the position they would have been in if they had never taken out the policy, the 8% interest is taxable and must be declared to HMRC or included in a self assessment tax return. The term “straightforward” should perhaps be qualified, as several sections of the Revenue’s savings and investment manual are devoted to how to deal with interest on compensation payments from different kinds of institution (now thankfully standardised by the Finance Act 2013).
As Benneyworth mentioned, PPI interest is a potential trap for the unwary at self assessment time as...