SAIM2120 - Interest: loan repaid early and PPI cancelled

Example where loan settled early and PPI stopped

Mr H took out a 5 year loan in 2008 from his bank of £20,000 and at the same time took out payment protection insurance (PPI) in case he was unable to meet the loan repayments. The PPI premium was £850 and was added to the loan balance so his total borrowing was £20,850. Mr H was able to repay the loan early and so in 2010 repaid the outstanding balance and cancelled the PPI. He complained to the bank in 2011 that the policy was missold.

The complaint was upheld and the bank paid Mr H the following amounts:

Amount A

The difference between the amount which was actually required to settle the loan with PPI (including any interest and charges net of any PPI premium refund) and the amount Mr H would have paid to settle the loan if he had taken it out without PPI. This was £550.

Amount B

The difference between the payments Mr H actually made and those which would have applied if he had taken out the loan without PPI. This was £450.

Once it had done this calculation the bank paid Mr H 8% interest on amounts A and B.

Amounts A and B are not taxable because they are refunds of amounts paid by Mr H but the bank also paid interest at 8% on amounts A and B.

The interest paid by the bank on amounts A and B at 8% is in respect of compensation and is taxable on Mr H. The interest is paid by a bank so tax will be deducted from the interest and Mr H 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.