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Tax on compensation for mis-sold PPI

I have received a cheque from my bank for being mis-sold PPI. Is any of it taxable? 

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. 

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