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Beware - you may have tax to pay on PPI Claims!

13 May 2013

As you will no doubt be aware there has been a lot of media coverage, not to mention the odd unsolicited telephone call or two, inviting you to seek compensation from lenders (yet again the banks as lenders have been in for some bad press!) for the mis-selling of payment protection insurance (PPI) on loan products. 

To date, there are a significant number of people who have had successful claims and have ended up with some unexpected windfalls of cash.

Often, the claim payment you receive back from the lender will be a combination of the compensation element, which equates to the sum of the original insurance payments you made over a period, plus interest, equivalent to the interest you would have earned in the period if the cash you had spent on the mis-sold insurance had instead been invested on deposit.

So, is this income taxable?  Well, the compensation element of the payment you receive is normally free from tax but the additional interest element will be taxable.

Why is this? 

It depends whether the interest you receive from the lender has already had tax deducted at source.  If the payment you received was from a bank or building society, for example, then you may be surprised to learn that there is no obligation on them to deduct tax at source before making the interest payment on the claim to you because the interest is not interest on a deposit account.  In addition, there are specific exemptions for banks and building societies from the need to deduct tax from yearly interest. 

So you will need to check whether you have had tax deducted from the interest payment made – this should be easy, as if a company does deduct tax, then there is a statutory requirement that it clearly advises you of this fact when making the payment and also provides you with the figures for both the gross and net amounts of interest.

If you already prepare a tax return then you will need to report the interest payment to HMRC, whether it is received gross or net of tax.  If you do not already complete a tax return, then you will need to contact HMRC and make them aware of this new source of income. 

No doubt the lenders will need to supply HMRC with lists of compensation payments made to people … so don’t be complacent as you could end up being involved in an enquiry if you omit to disclose this interest on your tax return.

If you have any queries on this issue then please get in touch with your usual Springfords contact who will be happy to help or e-mail us at mail@springfords.com

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