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Newsletter - Winter 2012

Payment Protection Insurance (PPI)

This is a subject that is something of a hot potato at the moment with widespread coverage in the media and via the internet about making a claim if you believe you have been mis-sold this product.

However, are there any tax implications to be aware of if you make a successful claim?

HMRC have confirmed that generally no tax is due on the repayment element of premiums or the refund of related interest paid to those who have been mis-sold PPI. However, the 'additional 8% interest' is taxable.

So how is the tax accounted for?

The matter is not clear cut as this interest may or may not have had the 20% basic rate (BR) tax deducted already. The position depends on the type of company making the interest payment. If banks and building societies are paying the interest there is no obligation on them to deduct BR tax because it is not interest on a deposit. There are also specific exemptions for banks and building societies from the need to deduct tax from yearly interest. The outcome is that some banks are deducting BR tax on the 8% gross interest and some are not.

Other companies generally do have to deduct BR tax and they then have a statutory requirement to advise the customer when making the payment that BR tax has been deducted and the gross and net amounts of interest.

Any recipient therefore needs to carefully check their tax position as action may be required. The correct tax position will depend on their individual circumstances but in general the position will be as follows:

a non taxpayer who has had BR tax deducted from the interest should make a claim to have the tax repaid to them by HMRC
a basic rate taxpayer who has had BR tax deducted will have no additional liability but will need to include it if they need to complete a tax return
a higher/additional rate taxpayer who has received interest with or without tax deducted or a basic rate taxpayer who has received interest without deduction will have to notify the interest to HMRC and pay the appropriate tax charges.

If in doubt contact us to ensure that the information is correctly accounted for and reported to HMRC.

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