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If you’ve not seen the massive publicity about the misselling of PPI (Payment Protection Insurance) policies, or been contacted by a no-win no-fee claims handling bureau then you’ve either been very fortunate, or living on the Moon for the past couple of years (although I’m not sure even that would guarantee no phone calls or texts).
To date in excess of £15 billion has been set aside by UK banks as compensation, but it is looking increasingly likely that at current rates of payment even this huge amount will be spent long before the scandal has run its course.
What seems to have missed most people’s attention however is the tax consequences of receiving PPI compensation.
Payments comprise two elements the premium refund, and interest (which in many cases is substantial).
Whilst the premium refund is tax free (as it’s a refund), the interest element is taxable as income and may have been paid gross, or have had tax deducted at source (depending on the organisation that is making the payment), but in all cases the claimant should be notified of the split and of any tax deducted.
If you’re a higher-rate tax payer, or already complete a Self Assessment return, the interest element is simply included on your tax return and tax paid, or reclaimed accordingly; however, as many people who will be in receipt of these compensation payments may not be taxpayers, or complete returns the situation is more complicated.
HMRC have issued guidance see link
Any tax due on 2011/12 payments should have been paid on 31st January 2013 and interest is accruing together with potential penalties where returns have been submitted without declaring taxable PPI interest payments. Anyone who has received PPI compensation is strongly advised to closely examine the paperwork that was issued with the award and seek Professional Advice on the taxation implications.
Contact the Burgis & Bullock Tax Team at your local office or on 0845 177 5500 to ensure you are not open to future challenge from HMRC, click here for online contact