PPI compensation could produce tax windfall

| May 11, 2012
PPI compensation could produce tax windfall

People who have received compensation after being mis-sold payment protection insurance (PPI) must pay tax on any additional interest on their payout.

It is believed that many victims of PPI mis-selling could be underpaying tax.

PPI was routinely sold alongside loans and mortgages in order to cover borrowers’ repayments if a change in circumstances meant they were unable to keep up the payments themselves.

Mis-selling occurred when PPI policies were sold without customers’ knowledge or to people who were ineligible under the terms of the insurance.

The compensation paid out to people mis-sold PPI policies includes an amount to cover the interest that would have accrued if the individual had never made the payments.

It is the interest element of the compensation that is taxable and to complicate the issue, this interest may or may not have had tax already deducted, depending on the type of company making payment.

HMRC has published information on its website on paying tax on interest from PPI compensation payments.

Banks have already paid out £1.9 billion in compensation and an estimated £5 billion is still expected to be paid out.

The flood of claims means that banks are having to significantly increase the provision they are making against PPI compensation claims.

Earlier this week HSBC said it was setting aside an extra £290 million, increasing its provision to £750 million.

RBS paid out an extra £125m in compensation claims over the first quarter of 2012, having already paid out more than £1bn.

Barclays paid out an extra £300m for payment protection insurance compensation in the first quarter, while Lloyds Banking Group set aside an extra £375m, taking its total to £3.6bn.

Banks have criticised claims management companies for sending in claims for customers who were never sold PPI, creating unnecessary processing costs.

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