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The Taxation of Interest on Payment Protection Insurance (PPI) compensation payments

This note gives basic advice on the taxation of interest paid on PPI compensation payments. Most payments of interest on PPI will come within the circumstances described but specific enquiries can be directed to the HM Revenue & Customs (HMRC) Taxes Helpline. Follow the link below to the Taxes Helpline.

Taxes Helpline

This note does not include advice on the reporting requirements of companies to HMRC for the interest paid and tax deducted or how the tax deducted should be paid over to HMRC.

Generally no tax is due on the repayment element of compensation paid to those mis-sold PPI. However, the additional interest is taxable.

The interest may have tax deducted depending on the type of company making the payment of the interest.

If banks and building societies are paying the interest then there is no obligation on them to deduct tax because the interest is not interest on a deposit and there are specific exemptions for banks and building societies from the need to deduct tax from yearly interest.

All other companies (including non-bank members of banking groups) have an obligation to deduct tax from yearly interest when it is paid.

If a company does deduct tax then there is a statutory requirement that it advises the customer when making the payment that tax has been deducted and the gross and net amounts of interest.

The customer’s final tax position will depend on their individual circumstances but in general the position will be as follows.

  • If the customer is a non-taxpayer and has had tax deducted from the interest then they may make a claim to have the tax repaid to them by HMRC in the normal way.
  • If the customer is a basic rate taxpayer and tax has been deducted from the interest then they need do nothing further unless they need to complete a tax return.
  • If the customer is a higher rate taxpayer who has received interest with or without tax deducted or a basic rate taxpayer who has received interest without deduction then the interest should be declared to HMRC in the normal way.