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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