PPI compensation liable to tax deduction Tax will be charged on PPI compensation interest

14 November 2011

Working out tax bill

Interest paid on payment protection insurance compensation payments is subject to taxation

Interest paid on payment protection insurance (PPI) compensation payments is subject to taxation, leaving millions potentially facing an unexpected tax bill.

Speaking on the Radio 4's Money Box programme, a HM Revenue & Customs spokesperson said: 'No tax is generally due on the repayment element of compensation paid to those mis-sold PPI. However, the additional interest is taxable - in line with other compensation claims.'

'Nobody should be worse off, as had the customer not purchased PPI, but kept that money in an interest-bearing account, the interest received would have been taxable.

'Customers should check with their PPI provider as to whether tax has been deducted at source.'

Calculate your tax

The tax will be charged on the typical 8% in lost interest offered to successful claimants on top of compensated PPI payments.

For help with calculating your tax bill including full details of tax allowances for the tax years 2010-11 and 2011-12, and examples of tax-free income and allowances, see our tax guides.

If you've got all the information you need about tax already and just want to work out your tax bill, you can download the Which? tax calculator. 

Reclaim PPI

The news comes following a recent Which? investigation into claims management companies offering to reclaim PPI on consumers' behalf which found misleading advice, unfair contract terms and a lack of transparency about fees.

If you are unsure whether you have paid PPI and are eligible for compensation when reclaiming PPI take a look at our online guide, including our free online tool. Since the launch of our free PPI tool in 2009, over 10,000 people have used it to submit a complaint to their provider over a mis-sold payment protection insurance policy.

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