Millions to be taxed on their PPI compensation
Millions of people who were mis-sold payment protection insurance (PPI) will be taxed on their compensation.
HM Revenue & Customs has stated that while no tax is due on the compensation element of the payouts, the 8% back-dated interest people are receiving will be taxable.
Around 6.4 million people were mis-sold PPI when bank advisers – working for a hefty commission – pushed this product to people such as pensioners, the self-employed and stay-at-home mothers who would never be able to claim on the policies.
After a lengthy campaign earlier this year, the High Court ordered the banks to pay out compensation. The banks have set aside £6 billion to cover claims.
As a result of the decision to tax the interest, the Treasury should rake in £350 million.
Payment protection insurance is designed to cover you should you fall ill, have an accident or lose your job and can’t make repayments on loans or credit cards. However, research by consumer watchdogs found the cover to be overpriced, filled with exclusions (policies exclude self-employment, contract employees and pre-existing medical conditions) and were often mis-sold because the exclusions were never fully explained. In May 2011, the High Court ruled banks had knowingly mis-sold PPI and ordered them to compensate around two million consumers.
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.