Home > Business Tax > Tax on PPI Repayments: What Do I Need to Do?

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.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
  • Dom
    Re: Claiming Tax Relief on Mileage
    I am paid a £250 per month travel allowance with my salary, and claim monthly travel expenses each month from the company for…
    13 September 2018
  • Fifi
    Re: How Will My Second Job Be Taxed?
    Hi I’m working 22hrs a week at 7.85ph but also signed up to an agency to work as and when, how much tax would I pay
    11 September 2018
  • Littledigidi
    Re: Claiming Tax Relief on Mileage
    Hi - I have a fuel card, the majority of my mileage is work related. can i claim any tax back on this. My company pay for all my…
    10 September 2018
  • TheTaxGuide
    Re: How Will My Second Job Be Taxed?
    B - Your Question:I have two jobs the first is as and when and the second is 12 hrs a week, combined I am nowhere near the…
    4 September 2018
  • Loui
    Re: How Will My Second Job Be Taxed?
    I am employed working 15hrs at £8.20 but get paid monthly and I'm self employed for 2 hrs a week at £8.00 a week. Would I get…
    3 September 2018
  • RichardW
    Re: How Will My Second Job Be Taxed?
    Hello, I am going to be earning two wages for 3 months soon and was wondering how my tax is going to work. My current job…
    26 August 2018
  • Andy
    Re: How Will My Second Job Be Taxed?
    Can my employer find out if I have a second job??
    24 August 2018
  • Amy
    Re: How Will My Second Job Be Taxed?
    Hi I have a part time job that pays £580 every 4 weeks. I have just accepted a second part time job that will pay about £250…
    21 August 2018
  • Angry
    Re: Company Car Tax Liability and Rules
    I have used a company car for the last 8 years bit as my car is at the end of the lease I asked to opt out of the company…
    19 August 2018
  • Gem
    Re: How Will My Second Job Be Taxed?
    If your second job is bank do you on my pay more tax when you have done shifts in this second job or every month even if not…
    16 August 2018