Interest on Payment Protection Insurance (PPI) compensation payments

HMRC has issued some basic guidance on the taxation of interest paid on PPI compensation payments.

Generally no tax is due on the repayment element of compensation paid to those mis-sold PPI (although where this has been paid through a business and tax relief claimed, the repayment will be taxable). However, in all cases the additional interest is taxable.

The interest may have tax deducted at source, or not, depending on the type of company making the payment of the interest.

The final tax position depends on individual circumstances but in general the position will be as follows:

·         Non-taxpayers who have had tax deducted from the interest may make a claim to have the tax repaid to them by HMRC.

·         Basic rate taxpayers where tax has been deducted from the interest need do nothing further (unless they need to complete a tax return). Such taxpayers receiving gross interest must declare it to HMRC.

·         Higher rate taxpayers who have received interest with or without tax deducted should declare this on their tax return.

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