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Tax is not typically due on the repayment element of compensation paid to taxpayers who were mis-sold payment protection insurance (PPI), but the additional interest on such payments is taxable.
Basic advice on the matter has been issued by the Revenue, which says most payments of interest will come within the circumstances described.
The interest may have tax deducted depending on the type of company making the payment of the interest.
If banks and building societies are paying the interest, there is no obligation on them to deduct tax because the interest is not interest on a deposit, and there are specific exemptions for financial institutions from the need to deduct tax from yearly interest.
All other companies, including non-bank members of banking groups, are statutorily required to deduct tax from yearly interest when it is paid. They must also advise the customer when making the compensation payment that tax has been deducted, and they should let them know the gross and net amounts of interest.
Depending on their circumstances, non-taxpayers may claim to have the tax repaid by HMRC. Basic-rate taxpayers need do nothing further unless they have to complete a return.
Higher rate taxpayers who receive interest with or without tax deducted, or basic rate taxpayers who receive interest without deduction, should declare the interest to the Revenue.
