The banks have already paid out £12bn to those who say they were mis-sold payment protection insurance (PPI) on credit cards, loans or other lending products. A proportion of this is interest on the compensation, paid at 8pc a year. But unlike interest on a savings account, many of the payments are untaxed.
Taxpayers therefore owe 20% of the interest receieved, or 40% or 45% for those on higher tax bands.
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said some of rise in the number of people who need to settle tax bills – estimated at a rise from 9.5 million last year to 10.5 million this year – may be due to PPI settlements.
The withdrawal of child benefit eligibility for one million middle class families has also swollen the numbers – around 630,000 kept the payments and were required to hand them back as a tax charge through the taxman’s self-assessment system by the January 31 deadline.
“We have called on the Government not to tax this interest.”
Banks typically repay any PPI premiums that were mis-sold together with any interest. In some cases, the interest can make up the bulk of the payment, particularly for older, backdated claims.
Customers, typically, are told they need to pay tax on the interest in the letters sent out with payments.
An HMRC spokesman said: “The interest may or may not have had tax already deducted depending on the type of company making the payment of the interest.
“If banks and building societies are paying the interest then there is no obligation on them to deduct tax because the interest is not interest on a deposit and there are specific exemptions for banks and building societies from the need to deduct tax from yearly interest.
“All other companies have an obligation to deduct tax from yearly interest when it is paid. If a company does deduct tax then there is a statutory requirement that it advises the customer when making the payment that tax has been deducted and the gross and net amounts of interest.”
He added that because the interest was a one-off payment, those receiving it could pay the amount due without having to enter the self-assessment system by calling the tax office. This could be done by pay immediately or by clawing the money back through an adjustment in the tax code of an individual, so effectively repaying the money back over the whole year.
Further tax will be due next year. Lloyds Banking Group today said it had increased the size of its PPI compensation provision to £10bn. Some estimates have suggested that the total repayment for UK banks could be as much as £23bn.
Do I need to report PPI interest to HMRC or claim income tax back?
This is the guidance from HMRC:
Your final tax position will depend on your individual circumstances but in general the position will be as follows.
· If you are a non-taxpayer and have had tax deducted from the interest, then you may be able to make a claim to have the tax repaid to you by HMRC. To find out more information on claiming Income Tax back follow the link ‘Tax refunds and reclaiming tax’ in the ‘More useful links’ section below.
· If you are a basic rate taxpayer and tax has been deducted from the interest then you need do nothing further unless you need to complete a tax return. If you need to complete a tax return you should enter the amounts in the appropriate section.
· If you are a higher rate taxpayer who has received interest with or without tax deducted, or a basic rate taxpayer who has received interest without deduction of tax, then the interest should be reported to HMRC. You should include the amount on your tax return or by contacting HMRC to report this new source of income. Follow the link below to report changes to your income to HMRC.