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HMRC internal manual

Savings and Investment Manual

Interest: loan and PPI run full term

Example where the loan and PPI run full term

Mr J took out a 4 year car finance loan in 1999 for £20,000 and at the same time took out payment protection insurance (PPI) through the loan broker in case he was unable to meet the loan repayments. The PPI premium was £850 and was added to the loan balance so his total borrowing was £20,850. The loan ran its full term and both the loan and the PPI finished in 2003. The PPI and historical interest on the PPI was £25 a month. He complained to the broker in 2011 that the PPI was missold.

The complaint was upheld and the broker paid to Mr J the difference between the payments he actually made and those which would have applied if he taken out the loan without PPI. This was £1200 (£25 a month x 48 months).

Once it had done this calculation the broker also paid Mr J 8% interest on the £1200 from the date that Mr J made the payments to the date that the compensation was paid.

The interest paid by the broker at 8% is taxable on Mr J. The interest is paid by a company that is not a bank so tax will be deducted from the interest. Mr J should inform HMRC about the interest and include the interest on his tax return if he is a higher rate taxpayer or becomes one as a result of the interest. Guidance on how to do this can be accessed from the front page of the HMRC website via the ‘Report a Change’ Quick Link.