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Tax on PPI Repayments: What Do I Need to Do?

By: J.A.J Aaronson - Updated: 4 Mar 2014 | comments*Discuss
Ppi Payment Protection Insurance Cover

Payment Protection Insurance (PPI) has become one of the most significant consumer scandals of recent years.

The mis-selling of this form of insurance was widespread, with many lenders apparently relying on the cover to make otherwise loss-making loans profitable.

Since the mis-selling of PPI was uncovered, lenders and insurers have been forced to pay back vast sums of money. Some of the biggest names on the High Street were forced into the red because of their mi-selling practices.

Thousands of consumers are understandably relieved to have their money back. But HM Revenue and Customs has now decided that the Exchequer is entitled to a portion of the cash – and many consumers have received surprise tax bills as a result.

So what is the background to the PPI story – and what is the tax position?

What is PPI?

Payment protection insurance is designed to cover you in the event that you are unable to make your debt repayments, generally because of illness or unemployment. The insurance will ostensibly cover your repayments for a specified period of time – generally 12 months.

Until recently, payment protection insurance was commonly sold at the same time as a loan, as an ‘add-on’ product. It appeared to be very popular amongst consumers, with tens of millions of policies in existence around 2008.

Why are people claiming it back?

In the end, though, PPI turned out to be one of the biggest consumer scandals in recent British history. A series of investigations by the Competition Commission, Financial Services Authority and others uncovered endemic and widespread mis-selling of the cover.

Policies were routinely sold by High Street banks to consumers without their knowledge. Meanwhile many policies were sold to individuals who would never be able to claim on them – for example because they were already unemployed or self-employed, or because they had a pre-existing medical condition.

This mis-selling has meant that many thousands of customers have now been able to reclam their premiums. The High Street banks have now been forced to collectively set aside billions of pounds to meet their repayment obligations.

What is the tax position?

In addition to the premiums, the Financial Services Authority determined that consumers should be paid interest on the money that they had been deprived of. It was decided that this would be paid at 8 per cent.

Towards the end of 2011 the government announced that tax would be levied on that interest.

This has meant that consumers have been landed with an unexpected tax bill following a successful PPI repayment claim. The government says that no one will lose out, as they would have been taxed anyway if the money had been kept in an interest-bearing account, rather than being spent on PPI. Of course, this is of little help to those individuals who probably wouldn’t have saved the money in the first place.

It is important to note that it is only the interest element that is taxable. The compensation part of the payment will generally not be subject to tax.

How do I pay?

First, you should understand that not everyone who has to pay tax will receive a demand. Rather, some lenders will deduct the tax at source. This will vary by institution. For example, RBS and NatWest have said that they will take the tax off before it reaches the consumer. Others, including Lloyds, Barclays, and HSBC, have said that they will not.

If you receive interest on your compensation, you may be required to complete a Self Assessment tax return. Although this sounds off-putting, it is in fact a relatively simple process. You will first need to register for Self Assessment. More information on this is available elsewhere on this site.

If you have received a tax demand from HMRC it is vital that you do not ignore it. You may be able to pay the tax from your salary, through the PAYE system. In either case you should call the Income Tax enquiry line on 0300 200 3300 for assistance.

How do I reclaim my PPI?

If you have PPI cover and you did not realise you had been sold it, or if you think the cover you were sold is not suitable for you, you should complete the Financial Ombudsman Services’ Customer Questionnaire, and send it to your insurer. While there are many companies looking to make money from PPI claims, it is worth noting that it is perfectly possible to complete the process yourself. You don’t have to pay a business to do it for you. Free advice is also available from your local Citizens Advice Bureau.

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