A spokesman for HM Revenue & Customs told Radio 4's Money Box programme: "No tax is generally due on the repayment element of compensation paid to those missold PPI. However, the additional interest is taxable - in line with other compensation claims."

http://www.bbc.co.uk/news/business-15701101

Millions face an unexpected tax bill over PPI compensation. Customers who have waited weeks, sometimes months for their money will have to pay tax on the interest they receive. It was agreed with the regulator - the FSA - that victims of PPI mis-selling would receive interest at 8% - but that could come down significantly after the revenue have had their cut.

http://www.bbc.co.uk/programmes/b0171x1r

Shafted

The usual Greedy British solution

I wondered what happens if rather than the standard calculation they give a goodwill payment instead-seen a few older cards/loans where the banks don't have/can't be bothered to find the old statements and negotiate a compensation payment and banks being banks they say its a good will payment in full and final settlement.

In that case you can't break down which bit is the "8%", so what would be taxable-the whole amount?, 8% of the total?, allof it?

Ali x

There has to be mention of 8% interest for that element to be taxable.

ims

Right so better from a tax point of view if they offer a settlement, but I guess you are probably loosing out on the total paid on these older claims where all the info is not available anyway.

Ali x

Right so better from a tax point of view if they offer a settlement, but I guess you are probably loosing out on the total paid on these older claims where all the info is not available anyway.

 

Ali x

Matters not the age etc. All that matters is how the award is worded, for example a goodwill settlement of, say £500 plus 8% int of £100 would still mean that the 8% int has to be declared to HMRC.

If it was just a a goodwill settlement of £600 (with no mention of interest), the amount of award is the same as above but no interest element to delare to HMRC.

ims

Ahh got it ims, so its how they break down the award that matters.

Ali x

Seems perfectly reasonable to me. I would expect to pay tax on interest anyway.

I think it is reasonable too - interest is nearly always taxable and an 8% return is not at all bad

I've recently received a £12k payout from MBNA for miss-selling PPI.

Having read this thread and the artcles attached, can anyone advise where I stand with a potential Tax liability?

The breakdown given by MBNA is as follows (rounded figures by me):

PPI Premiums charged since the sale date £3.9k

The amount of interest associated with the PPI premiums £5.7k

Total amount of 8% interest £2.5k

Total amount payable to you £12k

The link to the BBC website mentions tax deducted at source. How do I find this out?

In any event, I intend to ask MBNA to breakdown their calculations and I think that this subject gives me a ligitimate reason to seek this info, but is the tax liability on the "interest associated with the premiums" or the "8% interest" or both?

Thanks

It is only the 8% interest that is taxable (if you are a taxpayer)

ims

IMS21 is correct. So if you are a basic rate tax payer then your liability to tax is £500 on this. As it is a bit of a chunk I would suggest you put it aside straight away when you get the repayment. HOWEVER, you need to check when the settlement arrives whether MBNA has already paid the tax on your behalf. HMRC rules would indicate that interest should be paid net of basic rate tax (as interest on savings in the bank is usually paid), meaning that if you are a basic rate tax payer you have nothing more to pay. However some banks/card companies have not interpreted the rules that way and are paying gross. If tax has been deducted it will be clearly stated on the documentation and if in doubt you can always call MBNA and ask. (If the interest is paid with 20% tax deducted and you are not a tax payer you can get a refund from HMRC)

Part of your settlement is a refund of interest charge don the PPI premium. That is not liable to income tax.

Thanx for the guidance

I'm a higher rate tax payer so, based on my figures and these comments, I see two scenarios

1) Tax deducted at Source

Total Interest = £3125

20% Tax deducted (at source) = £625

Amount paid to me = £2,500

My Tax liability (another 20%) = £625

2) Gross amount paid to me

Amount paid to me = £2,500

My Tax liability (40%) = £1,000

So, I need to set aside between £625 and £1000, to keep the Revenue happy, at the end of this Tax year

Correct?

As a side issue. how do the Revenue get to know about this? My honesty?

Cheers

You pay tax at whatever your tax rate so yes what you say looks right to me.

Most banks pay gross....there are only a couple that deduct at source.

It is up to you to make a full declaration of your tax affairs each year...not for HMRC to find out.

ims

You pay tax at whatever your tax rate so yes what you say looks right to me.

 

Most banks pay gross....there are only a couple that deduct at source.

 

It is up to you to make a full declaration of your tax affairs each year...not for HMRC to find out.

 

ims

Any payments of interest over £50 in a tax year are automatically notified to HMRC by the bank in question. IN practice you are not talking about huge sums here in the grand scheme of things.

How much extra you pay depends on whether the £2500 you get is the net or gross figure

Any payments of interest over £50 in a tax year are automatically notified to HMRC by the bank in question. IN practice you are not talking about huge sums here in the grand scheme of things.

 

How much extra you pay depends on whether the £2500 you get is the net or gross figure

Yes agreed...but the onus is still on the taxpayer to make a full declaration.

ims

Absolutely. I meant that as a warning!

Thanks for the info guys.

I think I'll just whistle up HMRC as soon as this tax year is over and get it sorted

It looks like I now need to reel-in my wife's ambitions about blowing the lot on shoes....

I'd keep my mouth closed and say nothing

Consider it as your share back that bought the banks!!!!!

interesting reading here.me and my partner have just been sent a 7k refund of payment protection

insurance.my partner works full time and pays tax.however i,m currently in reciept of employment

and support allowence.this is a joint account.does this mean when we put this money in to

our joint building society account i will be taxed as i,m on benefits ? if so what rate would that be

at many thanks.

How is this worked out if the settlement has PPI premiums, Compounded interest and 8% Stat on top?

Surely if the PPI was never added then the Premiums could have been invested in an ISA?

This is not as simple as it seems?

How is this worked out if the settlement has PPI premiums, Compounded interest and 8% Stat on top?

Surely if the PPI was never added then the Premiums could have been invested in an ISA?

This is not as simple as it seems?

It is simple as far as tax law is concerned on the 8%.

Where you pick up the point about the premiums and contractual which would have been available for investment elsewhere, this is where the principle of restitution comes into play.

It boils down to the regulatory or court route

ims

Waddington

Everyone is entitled to an annual personal tax allowance which is currently £7475 .

If your total income from wages, some benefits and investments exceed that figure, you will pay tax on the balance at 20% on the first £35k of your income.