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Vulnerable PPI consumers hit by tax on savings changes

Tax on compensation interest

If a complaint about a mis-sold Payment Protection Insurance [PPI] is upheld the compensation paid by the firm is intended to put the customer back in the position they would have been in had the mis-sale not taken place. This is often called ‘general redress’ and usually includes a refund of PPI premiums, a refund of historic interest where the PPI premiums were added to a loan or credit card and simple interest at 8% per annum (which is intended to compensate the customer for being deprived of the use of the money they paid to the PPI firm).

Tax for vulnerable non-tax payers?

Tax rules state that the refund of premiums is not taxed, but that the interest is. This in its self is not unreasonable as it follows the same logic as that applied to other unearned interest such as interest paid on a building society investment account. Accordingly, tax payers are required to pay tax on the interest element of the compensation, otherwise they might be put in a ‘better’ position than they would have been in had the mis-sale not taken place. Although some argue that they should be better off, after all the compensation is also repaying them for the inconvenience. That is not how our compensation rules are currently formed. Simple so far, as the Financial Service Ombudsman website currently shows:

  • “If the consumer is not liable for income tax at all, they can reclaim from HMRC any income tax deducted by the financial business.
  • If the consumer is liable for income tax at the basic rate, and the business has not deducted tax at the basic rate, the consumer is responsible for telling HMRC.
  • If the consumer is liable for income tax at a higher rate – whether or not the business has deducted tax at the basic rate – the consumer is responsible for telling HMRC.
  • If the consumer is liable for capital gains tax, the consumer is responsible for telling HMRC. Financial businesses do not deduct capital gains tax.”

Consumer detriment and arrogant assumptions

It is naive to assume that consumers who are not liable for basic rate tax and who have had tax deducted from part of their compensation by the firm will find it easy to reclaim the amount incorrectly paid to HMRC. These consumers have to complete a HMRC R40 form to obtain a refund and this is not a simple task for many consumers – it is arrogant of financially astute financial industry practitioners to assume that this is an easy task for all consumers.

April 2016 budget twist – changes mean new processes should be adopted

Matters became even more complicated as a result of tax changes in April this year mean that, as MoneySavingExpert.com [MSE] states, “most UK adults will be able to earn up to £1,000 interest a year on their savings without paying tax on it. This is the biggest savings shake-up for a generation, meaning 95% of people won’t pay tax on savings.” MSE’s prediction simply followed the government line at the time as within the budget announcement; treasury sources predicted that the change would mean that 95% of savers would have to pay no tax on their savings whatsoever.

Poorly treated consumers suffer further detriment!

Logic would also follow that this change would also mean that 95% of consumers who receive an element of interest in their PPI compensation should not be paying tax on that amount. But banks are still deducting tax from compensation payments and sending sums to HMRC. Yet nowhere in the redress offers seen by the PFCA is this situation explained. Nowhere does it explain to a customer know how they might obtain a refund from HMRC if they are a tax payer and earn less than £1,000 unearned interest or they are a non-tax payer. Frankly, consumers who have already been poorly treated are subjected to further detriment as a result of banks inflexible and uncaring procedures.

What should be done?

As a result of the April 2016 budget changes, many Banks are no longer deducting income tax from the interest paid on savings accounts. So why are banks treating PPI compensation differently? There is certainly no logic now in banks continuing with their automatic tax deduction policies. The bank industry approach now causes significant detriment to consumers and the PFCA calls on regulators to ensure that financial firms pay the whole award to the consumers and include with the redress payment an explanation of what to do if their interest on savings and PPI redress exceed £1,000 in a tax year.

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