Posted: 18th July 2017
& filed under PPI
3 Things You Might Not Know About Your PPI Compensation
You might have received your banks offer of PPI compensation and must be salivating at the thought of this unexpected and significant source of income, but the reality is that once you get your hands on your compensation, you might be faced with other eventualities. We discuss these scenarios in detail here.
Your PPI Compensation is Taxable
The Government has confirmed that Millions of victims of payment protection insurance mis-selling will have to pay tax on their payout.
Anyone who gets interest back on top of the compensation amount is liable if they are a taxpayer. The compensation itself is not taxed so any money you owe will be a small proportion of the overall payout.
Some PPI sellers deduct taxes from redress, but not all do, meaning many will have to make additional payments.
Banks, building societies, credit card firms and other lenders have paid out for mis-selling for years but there has been a huge build-up of momentum following the collapse of the banks' attempt to block automatic payouts in May.
An estimated 3 million people could be due compensation which means a windfall for the Taxman.
Here's what you need to know:
Who Owes Tax?
Interest on PPI compensation is treated as savings so all taxpayers who are paid additional interest will owe tax.
This is because the idea of compensation is to put you in the same place you would have been had you not been mis-sold PPI. Had you not paid out the PPI premiums it is assumed you'd have that cash in the bank. Additional interest is paid as compensation as it is assumed you'd get a return on that money in the bank.
Therefore, it is taxed same as a savings account would be.
However, interest is not paid on credit card PPI redress always. Where it is not paid there is no tax owed.
How to know if
I've been paid interest?
It should be split out from the compensation on your redress offer letter from your lender.
PPI Refund when Loan is Paid Off Early
In several cases, the PPI premium is charged in one single lump sum, called ‘single premium.’ This premium is added to the loa
d sanctioned. According to this, you can also say that the monthly payments that the buyer makes towards the cost of the insurance are not really the premiums, but additional loan repayments.
This means that the buyers don’t have the option of just stop pay
ing for PPI. Instead, they are supposed to get a refund. However, this refund may be refused or amount to a sum which is too less for you. Most of the consumers argue that such arrangements are unfair, especially if the loan is paid off early in order to restructure the debts. In these circumstances, the individual facts of the case are considered, which are particularly things told to the customer while being sold PPI. Hence, if the lender did not explain all this to the buyer, they have to pay the additional interests and premiums to the buyer along with the principal amount of refund.
The State Adds To Your Compensation
When it comes to claiming a PPI refund, it is not just the financial institutions and the banks who come into the picture of making sure you are repaid a sufficient amount. The State also adds a portion from its wealth when you make PPI claim. Currently, it is 8% of the principal amount to be repaid to you. Also, in the case of severe illness and emergency, the State may also offer various welfare benefits along with your compensation. Hence, there is a little you need to worry about if you are certain that you were mis-sold a PPI policy.