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HMRC internal manual

Savings and Investment Manual

Interest: both loan and PPI still running

Example where loan and PPI still in existence

Ms G took out a 5 year loan from her bank of £20,000 in 2007 and at the same time took out payment protection insurance (PPI) in case she was unable to meet the loan repayments. The PPI premium was £3000 and was added to the loan balance so her total borrowing was £23,000. By the time her complaint was upheld she had made four years of repayments of £500 a month of which £70 was for the PPI premium and historical interest on the PPI and her loan balance was £5800.

The bank put Ms G in the position she would have been if she had not taken out the PPI. The loan was restructured so that any amounts payable by Ms G in respect of the PPI (including any historical interest and charges) were cancelled. The bank also made sure that the number and amounts of any future repayments are the same as would have applied had Ms G taken out the loan without PPI.

  • The bank repaid Ms G the PPI payment of £70 which included the premium and historical interest for the months she had paid it - total amount refunded was £3360 (70x48). This amount was credited to her loan so she had less to pay in the final year
  • Ms G’s loan balance for the last year of the loan was recalculated to exclude the PPI premium for that year.
  • Once it had done this calculation the bank paid Ms G 8% interest on the premium and historical interest refund of £3360. The amount of interest paid was £269

The repayment of the premium and the refund of historical interest are not taxable because they are refunds of amounts paid by Ms G. The interest of £269 paid by the bank at 8% is taxable on Ms G. The interest is paid by a bank so tax will not be deducted from the interest. Ms G should declare the interest to HMRC or include it on her tax return. You can access guidance on how to do this from the front page of the HMRC website via the ‘Report a Change’ Quick Link.