Do you have to pay Tax on compensation received from mis-sold PPI Insurance?

I am so proud to announce that the my answer to this question appeared in yesterday's edition of the Daily Express National Newspaper. I was asked to answer this question by Annie Shaw who regularly writes for the Daily Express and I truly thank Annie for this amazing opportunity. If you did miss yesterday's edition I have included the article below.

I have received compensation for PPI miss-selling. I heard on the radio that I now have to pay tax on it. Surely this can’t be right?

When it was announced that Banks and lenders would award compensation to PPI Customers who had been miss-sold policies, it was agreed by the FSA that this compensation would come with an additional 8% interest on the money originally spent on the policy. The interest element is what is taxable and only accounts for a small part of the compensation. The interest on the compensation is treated the same way as savings income so all taxpayers who are paid additional interest will owe tax on this amount and this should be declared to HMRC with the onus being on you to declare the correct information.

One must be careful to check exactly how the compensation has been paid as some lenders will deduct basic rate (20%) tax at source where others will be paid gross. It is very important to go back and re-read your letter carefully.  If you are a basic rate tax payer and the interest has been deducted at source then there is nothing further for you to do unless you complete a self assessment tax return then the interest would need to be declared on the return. The more likely situation is that the interest has been paid gross. If this is the case I would suggest writing to your tax office using your national insurance number as a reference and stating the amount of interest you have received. They should then put the interest in your tax code making it a hassle free way for HMRC to collect the additional tax.

For further help and anything tax please contact Mitch Young from LJD Chartered Accountants mitch@ljd.uk.com

Hopefully I may feature again - fingers crossed

Mitch the Tax Man