PPI compensation leads to tax concerns


Financial experts are becoming increasingly concerned that recipients of PPI (Payment Protection Insurance) compensation are underpaying tax.

PPI compensation

PPI compensation has made huge headlines over the past couple of years, with many of the UK’s major banks paying billions in compensation to people who were wrongly sold the insurance. Last year UK banks paid out £1.9 billion in compensation and the total bill is expected to be above £5 billion.

There are generally two parts to the payout, compensation and in some cases interest on the compensation amount.

The average payout is £3,000 and whilst the compensation, which forms the largest proportion of any payment made, is tax free any interest is taxable and should be declared to HMRC.

Confusingly some insurers deduct tax from the interest, whilst others do not leading some financial experts to become concerned that recipients of compensation may not be aware that the interest is taxable and therefore inadvertently underpaying tax.

Recipients of compensation can contact a special HMRC helpline for guidance on how any interest should be declared.