PPI compensation prompts tax concerns

Victims of the mis-selling of payment protection insurance (PPI) could "inadvertently" be underpaying tax after receiving compensation payments.

HM Revenue and Customs (HMRC) has confirmed that no tax is levied on the compensation sum victims receive, but it is on any additional interest paid.

Chas Roy-Chowdhury, of the ACCA, called on the government to withdraw this tax.

Last year, banks paid out £1.9bn to the victims of mis-sold PPI. An estimated £5bn is still expected to be paid out.

PPI is supposed to cover borrowers' loan repayments if they fall ill, die or lose their jobs. It became highly controversial after the policies were sold, often without the customer's knowledge, along with loans and mortgages.

The average payout in compensation is £3,000. This includes a capital sum - based on the PPI premiums paid - and interest that would have accrued if the individual still had never made those payments.

Only the latter is taxable. The interest on this may or may not have had tax already deducted, depending on the type of company making payment of the interest, HMRC said.

Mr Roy-Chowdhury, head of taxation at the ACCA accountancy body, said: "There is huge scope for people to be underpaying tax inadvertently."

He said that the Treasury should not benefit from a tax windfall owing to the compensation payments, but should instead change the law in order to cancel any tax charged relating to PPI compensation.

HMRC was simply following the rules as they stood, he said.

The tax authority has a helpline for anyone unsure of how to declare this income.