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HMRC internal manual

Savings and Investment Manual

Interest: loan still in existence but PPI changed

An example of alternative redress

Sometimes the compensation claim is settled with the compensation being calculated as if the customer had taken out a different type of PPI. For example if the customer took out single premium PPI and there is no evidence to suggest that the customer would not have brought any form of PPI at all.

In these cases the firm may compensate the customer as if he had bought a different type of PPI, for example if instead of a single premium PPI the customer had purchased a regular premium PPI policy.

Mr P took out a five year car loan for £10,000 through his bank and at the same time took out PPI. The premium on the PI was £2500 and added to the loan balance and so the total amount he borrowed as £12,500.

Mr P complained about the single premium PPI and his complaint was upheld 20 months into the loan period. His compensation was calculated on the basis that Mr P would have taken out a monthly premium PPI. Just as in SAIM2115 the bank arranged for the loan balance to be restructured as if Mr P had taken out the loan without PPI and future loan payments were reduced to £200 a month for the remainder of the loan.

In addition the bank paid Mr P the PPI premium and historic interest for the single premium PPI - this was £50 a month, total £1000.

From this amount the bank deducted the premium he would have paid if he had had monthly PPI from the beginning of the loan. This would have cost £18 a month and the total is £640.

The net repayment received by Mr P was £360 (£1000-£640).

In addition the bank also paid Mr P interest at 8% on the £360 which is £45. The total repayment made to Mr P was therefore £405.

The interest paid by the bank of £45 is in respect of compensation and is taxable on Mr P. The interest is paid by a bank so tax will be deducted from the interest and Mr P should declare the interest to HMRC or include it on his tax return. Guidance on how to do this can be accessed from the Dealing with HMRC pages on GOV.UK.