There has been some talk lately about at the issue of paying tax on payment protection insurance claim payouts. If you are planning on claiming back money which was incorrectly taken from you then you will be interested in seeing what this matter is all about.
The first thing to point out is that the bulk of the payment protection insurance claim isn’t affected by this. You will receive a compensation payment which is entirely free of tax and it is only the lost interest payment on top of this which you need to pay tax on.
This might sound a bit confusing at first but if we look at it in detail we can see that it makes perfect sense. After all, you are getting given an amount of money to replace the interest you would have earned on it had it been in your bank account all of the time. However, had it been in your account then you would have been paying tax on the interest which had accrued anyway.
If we look now at the figures, a payment protection insurance claim will give you an 8% interest payment on top of the main figure you claimed back. Assuming that you are on rate tax level then you will need to pay 20% of this interest amount in tax.
An Example
So, say you make a claim for £10,000 and get given an interest payment of £800 on top of the main amount. You then need to pay tax of 20% of the £800, which is £160. The amount in your pocket then is a total of £10,640.
Of course, you are paying back tax on this money on the basis that it would have been earning interest and accruing a tax liability instead of sitting in your bank’s funds. Had you not been given an inappropriate payment protection policy then perhaps would you have simply spent the money instead of putting it into your account though? This is a purely academic point, as the rules are clear and there is no getting away from the need to pay out tax on that portion of your payment protection insurance claim.
Author Bio:-
A payment protection insurance claim attracts a tax liability but only on the lost interest portion of the amount paid out by the bank to the affected customer.