Consumer Law Blog

Will your PPI payout be taxed?

You may have heard recently that those reclaiming Payment Protection Insurance from their bank or lender could face a tax on their compensation. While this is largely true, it doesn't tell the whole story. The reality is that compensation payments themselves are not affected - tax is charged on the 8% in lost interest that is paid on top of PPI payments.

This may sound harsh, but it is to be expected. If the money had simply been left in the bank rather than being spent on PPI, the notional interest accrued would be taxable.

If you take a look at the PPI reclaiming figures, they remain very positive for the consumer. The 8% interest being paid on top of compensation is already considerably higher than the rate of interests that have been available from high street banks. If you are a basic rate tax payer then you will pay 20% in tax out of the 8% you receive in interest.

This means if you were due to receive £5000 in compensation, you would be paid an additional £400 in interest before tax. The tax would be £80 leaving you with £5320 to take home.

With this confirmed, there is still the interesting ethical question of whether it is right for tax to be paid on the interest. The assumption seems to be that tax should be paid because the money would have been earning money if it had been left in a bank. This seems to neglect the fact that the majority of people who paid PPI were taking loans which means they likely had no money in the bank.

Indeed, those people would have been expected to pay interest on those loans; so you perhaps could argue that it would only be fair for the banks to have to pay back the interest they would have charged debtors which would almost certainly have been considerably more than 8%. However, it seems like this is unlikely to happen.

If you think you have been mis-sold PPI, start your PPI claim with Claims Financial today. Our claims team will work hard to ensure that you are paid back every single penny you are owed.

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