Successful PPI claimants could be owed a £350 million rebate from the taxman because they may have paid income tax twice on their compensation.
It has emerged that some lenders paying out successful PPI claims have deducted 20% income tax at source from the interest element of the payout because, historically, savings interest on normal accounts was paid net of interest.
But then the claimants were charged income tax again after their lenders calculated how much they were due to receive.
However, since 2016 ordinary rate taxpayers have been able to claim £1,000 of savings interest a year tax free (£500 for higher rate earners) and so should never have paid tax at all.
Tax expert Richard Morley said the ‘vast majority’ of taxpayers known nothing about this anomaly and urged Her Majesty’s Revenue & Customs (HMRC) to issue guidance urgently.
He said: “People are really confused about the rules. I’ve met almost no clients who know about this.”
David Byers, assistant money editor of The Times, said: “Millions of people who received compensation from Britain’s biggest mis-selling fiasco may be owed tax rebates totalling hundreds of millions of pounds.
“A total of £13 billion has been paid out in compensation since the savings allowance was introduced in April 2016, of which £1.75 billion is thought to be interest.
Based on these figures, savers may be owed up to £350m in tax they should not have paid.”
PPI compensation payouts have two elements – the actual premiums paid and an extra 8% to cover the interest that money would have made had the policy not been mis-sold.
Compensation paid on a loan or mortgage has a simple calculation of 8% of the money paid. However, the calculations for credit and store cards are more complicated because interest was calculated each month on the balance owed on the card, sometimes over many years. The interest element on these claims can be substantial.
Experts say that anyone wanting to claim overpaid interest should use an R40 form available on the GOV.UK website.
The claim can either be made online or printing off the form for completion and posting to HMRC.
However, there is a downside to the income tax anomaly.
Any higher rate earners with successful claims could find themselves being chased by the taxman as they should have been taxed at 40% or 45% of the interest element of their payout and might therefore still owe 20%.