PPI - deduction of BR tax off claim - why?

[Willhire89]

So I had PPI on a BoS credit card for 17 years.

I wrote to them and they will refund the premiums paid but what I found interesting is that the claim has 20% tax deducted by them - what's the deal with that?

I can't think of another 'claim' type scenario where a tax deduction is made.

[Hackney]

I got a PPI refund some years ago and had to declare it to the IR.
In my case it was because they had to pay interest on the money, so I was paying tax on that.

Are you sure it's tax on the PPI refund and not tax on the interest?

[Willhire89]

The premium refunds are subject to compounded interest - after all they started in 1992

You could say the interest balances the loss (as intended) so notionally there's no gain.

[sideways sid]

The total payment is intended to redress the situation so that you are in the same position now as if you hadn't bought the policy.

The premium is refunded without any tax treatment.

Interest is paid (in some older cases at 15%, or 8% for recent cases) to reflect the loss of interest if you had put the premium in the bank.

This interest would have been taxed (unless in an ISA) so you now pay tax at the basic rate, reclaimable through the tax office for non-taxpayers.

In practice for many people, getting 8% interest risk-free on money that wasn't necessarily missed is pretty good even after deducting tax!