We’ve all had them over the past few years…. an endless barrage of calls from legal claims companies claiming to be able to recover Payment Protection Insurance (PPI) that was mis-sold to us by banks and other credit providers. For some of us they have been simply an unwelcomed nuisance but for many others they have been the start of a journey towards an unexpected windfall. We all know of someone who has been able to claim back hundreds of pounds in respect of credit cards that they have long since stopped using or a loan that has been long-since repaid. If you were one of those people there is something that you need to be aware of to avoid falling foul of HM Revenue & Customs (HMRC).

The refunds of PPI premiums paid are non-taxable and, as such, do not need to be disclosed on self-assessment tax returns. Similarly, any repayment of interest where the PPI premiums were added to the loan amount are also non-taxable. The refund of these simply put the claimant back into the position that they would have been in had they not taken out the PPI and represent what is referred to as ‘general redress’. However, in many cases the amount received will have included an additional 8{af331c3cb52abe27a47f1f5b71fb5068c938efb8d5a4e6cddc7f2780f48bb99c} interest on the total refunded amount, paid as compensation for the mis-selling of the PPI. This compensation, unlike the refunded PPI premiums and historic interest, is taxable and needs to be reported to HMRC as taxable income. Some institutions will have paid the interest net of basic rate tax, whereas others may have paid the interest gross with no deduction of tax. In either case, the institution issuing the refund should provide a breakdown of the amount repaid in the redress offer letter indicating whether or not basic rate tax has been deducted at source.

So, what do you need to do? Well, if no tax has been deducted or if you are a higher rate tax payer and only 20{af331c3cb52abe27a47f1f5b71fb5068c938efb8d5a4e6cddc7f2780f48bb99c} basic rate tax has been stopped, then you will have a tax liability which will need to be reported to HMRC. This should generally be paid in the tax year in which you received the payment but you have an obligation to declare any income on which tax is due in the last six years, so, if you received a payment a few years ago, it will still need to be declared to HMRC this year if you haven’t previously done so. If you complete a self assessment tax return, the amount received (an any tax deducted at source) will simply need to be included on your tax return along with any other income received during the year. If you are employed and don’t complete a tax return you will need to inform your tax office so that adjustment can be made to your tax code allowing the owed amount to be collected through the PAYE system. If you have any concerns or are unsure what you need to do in respect of a PPI refund that you have received contact your accountant who will be able to advise you.