Tax on compensation for mis-sold PPI

The tax due will depend on the different components making up your cheque. Typically, it will consist of:

1. a refund of the PPI premiums themselves
2. historic interest (interest paid on the PPI premium because it was added to a loan or credit card)
3. simple interest at a rate of 8% per annum

The simple interest is to compensate you for being deprived during the term of the PPI policy and is taxable- like any normal bank interest is.

The bank may deduct basic rate income tax of 20% before paying you the simple interest. As a result, if once you include the interest in the calculation of your total income you are still a basic rate taxpayer, you should not need to complete a tax return nor have any additional tax to pay on it.

Interest up to £1,000 (£500 for higher rate taxpayers) may be tax-free if it is covered by the personal savings allowance. If you think tax has been incorrectly deducted from your interest, you may be able to get a tax refund. 

If the simple interest is not taxed and exceeds £10,000 or if you are not a basic rate taxpayer, then there could be tax implications and you should confirm with HM Revenue & Customs whether they require a tax return from you. Conversely, if your income is under the personal allowance, you may be due a tax refund.  

Your local TaxAssist Accountant would be happy to complete your tax return for you and can liaise with HMRC if there is a problem with the amount of tax you're paying. Contact us if you’d like to discuss your circumstances in more detail. 

Date published 7 Sep 2015

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.