Individuals receiving compensation for mis-sold payment protection insurance (PPI) are unaware they may be liable to pay tax on awarded payments, after HMRC clarified its position on PPI and taxation.
HMRC confirmed that while no tax is due on the repayment element of PPI compensation, tax is however due on the additional interest.
PPI was designed to cover loan repayments, including mortgages and credit cards, should the policy holder fall ill or become unemployed. It has increasingly been revealed it was sold to those ineligible to make a claim and, in many instances, people were unaware that they had actually purchased the discretionary insurance.
Figures from the Financial Services Authority (FSA) show that banks and building societies are estimated to have paid out around £2.1 billion in PPI compensation claims to date.
According to the BBC, the average PPI pay-out is around £3,000, including 'a capital based sum - based on the original PPI premium paid - and interest that would have accrued if the individual still had never made these payments.' Only the latter interest part is taxable.
The clarification has led to some accountancy bodies calling on the Government to withdraw the tax. Speaking to the BBC, Roy-Chowdhury, head of taxation at the ACCA accountancy body, said that the law should be changed and added: "There is huge scope for people to be underpaying tax inadvertently."
HMRC has said that PPI compensation may or may not have had tax deducted by the company, bank or building society making the payment and that an individual's tax position regarding PPI compensation will depend on personal circumstances. In general, it said: