Interest: payment protection insurance (PPI) compensation
Payment Protection Insurance (PPI) is sold to people taking out loans or credit cards as insurance against not being able to make the repayments on the loan or credit card. If taken out on a loan and paid as a single premium at the start of the loan it is often added to the loan balance so that the debtor pays interest on the PPI premium as well as the loan. If a monthly premium PPI is taken out then the premium is based, for a credit card on a percentage of the debit balance on the credit card, or for a loan on the amount of the monthly repayment. The monthly premium is added to the monthly credit card balance or to the monthly loan repayment.
If a complaint about the mis-selling of PPI is upheld or the firm that sold the PPI has agreed to compensate the customer, the customer will usually be put in the position they would have been in had they not take out the PPI. This is sometimes called general redress. General redress may include:
- a refund of PPI premiums
- historic interest (interest paid by the customer on the PPI premium if it was added to the loan or credit card)
- simple interest at a rate of 8% per annum which is to compensate the customer for being deprived of the money they had paid to the firm for the PPI.
The 8% interest paid by the firm will be taxable on the customer and it must be declared to HMRC or included in a self assessment tax return.
The following pages give examples of how PPI compensation may be calculated. They do not cover every situation. If a customer has received PPI compensation that does not fall into one of these examples it may still be possible to identify the 8% interest element in the compensation calculation. If this is not possible then contact the BAI Financial Products Team.
See SAIM9115 for changes to the rules on deduction of income tax from interest relating to compensation. The new rules apply to payments by a building society that are made on or after 1 September 2013 and to payments made by other institutions on or after 1 October 2013.