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News

Borrowers awarded PPI compensation face unexpected tax bills

Hundreds of thousands of borrowers awarded compensation for mis-sold payment protection insurance are being hit with unexpected tax bills.

Many of those sold the cover — designed to pay out if you fall ill or are unable to work — were ineligible to claim because they were too old or self-employed.

They are finally receiving payouts after banks were forced to set aside more than £7billion in compensation following their defeat in a crucial High Court case in April.

But while the bulk of the compensation is tax-free — made up of repayment of PPI premiums plus a ‘distress’ sum for wrongdoing — many face a tax demand on the interest.

As part of rules to restore a borrower’s original financial position, banks must also pay 8 per cent interest on all the PPI premiums paid by each borrower. This sum is treated as if it had been sitting earning interest in a bank account — and therefore must be taxed accordingly.

However, different methods put in place by banks for repaying this money have sparked confusion. While most, including Lloyds, Barclays, HSBC and the Co-operative Bank, are not deducting the 20 per cent tax at source, RBS and NatWest are.

Mike Warburton, tax director at accountant Grant Thornton, says it is vital to check how the compensation is paid, as gross payments must be declared to the taxman.

If you think you have a claim for missold payment protection, use our online PPI calculator to get an estimate as to how much you could be owed, then get in touch with Creditline Financial by calling 01733 393399.

Posted by Michael Castellano on 17 Nov 2011

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