Know your tax position on PPI repayments, accountant warns
With new figures revealing the number of compensation claims for mis-sold Payment Protection Insurance has almost doubled in the past year, a Shropshire accountant is reminding local residents affected by the scam of the tax implications of any repayment they might receive.
Statistics published last week by the Financial Services Compensation Scheme (FSCS), the body funded by an industry levy, found that more than 19,000 people submitted cases in 2012, up from around 11,000 the previous year.
Fiona Green, Taxation Director at Shrewsbury-based DJH Accountants, has urged anyone that might have been a victim of mis-sold PPI that they need to be aware they may have to pay tax on the interest they receive on their compensation.
“The good news is that only a small proportion of any PPI compensation is taxable,” Fiona explained. “The refund of the actual PPI payments and associated interest on the premium are tax-free. However, victims of mis-sold PPI also receive a payment of 8% statutory interest on top of the compensation, which HMRC treats in the same way as savings, and is therefore taxable at the same rate as your income tax band.
“Some banks and building societies are automatically deducting the 20% basic rate tax on the 8% interest, while others aren’t, so it’s crucial individuals double-check to clarify their position. Non-taxpayers who have had the basic rate automatically deducted can make a claim for repayment from HMRC, while basic rate taxpayers will have no additional liability, but are still required to include the details if they have to complete a tax return.
“Top rate taxpayers need to notify HMRC of the interest received, whether it has had the basic rate deducted or not, and arrange to make the appropriate payment in full, or as a top-up to the 20% they might have already paid. Anyone requiring clarification on their situation should get in touch with a member of our team for an informal discussion on their position,” Fiona concluded.
PPI was sold on loans and credit cards, and was designed to cover an individual’s payments should they ever be unable to work due to accident, illness, or redundancy. However, it was mis-sold to people who either had no requirement for the protection, or for whom it was totally unsuitable, opening the floodgates to thousands of compensation claims. It is thought as many as three million people could be due some form of reimbursement, which could total as much as £9 billion.
