Three years ago we were advised about the taxation of settlements of payment protection insurance (PPI) claims – see our newsletter on 13 February 2014. Many thousands of people received such payments, and most believed that the entire payment was tax free, so it would have no effect on their tax liability.
In reality the settlement will have included interest calculated at 8% on the PPI premiums refunded. That interest is taxable, and some banks deducted basic rate tax, but other lenders did not, see examples in HMRC’s savings and investment manual. In either case the interest portion of the PPI settlement should be declared on the taxpayer’s return for the year in which it was received.
HMRC have now woken up to the fact that many taxpayers forgot about the PPI interest when completing tax returns, so they have written to around 10,000 individuals asking them to check the interest entries on their 2014/15 returns. We won’t have received a copy of this letter, as it was not copied to tax agents, even where an agent was appointed to act.
A statement from HMRC said the letters were targeted using information from banks, financial institutions, third party intermediaries and social lenders. However, this data could only be matched to taxpayers using names and addresses, as NI numbers were not recorded by the interest payers. It is possible that some of the letters will have been mis-directed.
HMRC’s letter does not mention PPI, so it may fail to jog the memory of the recipient. If you have received such a letter, we will certainly double check whether your regular bank interest was correctly recorded, but we will also ask you about any PPI settlement you may have received.
The 2014/15 SA tax return can be amended online until 31 January 2017. Corrections for earlier years will have to be notified to HMRC by letter.
Written by the Tax Advice Network