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IVA and PPI Compensation

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proudmary | 19:41 Sun 29th Apr 2012 | Personal Finance
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Hi all, I hope someone can help? For various reasons I got into debt, I entered into an IVA (not recommended with hindsight) which I have been paying for 4 years. The debt management company instructed another company earlier this year to claim back any PPI due on my behalf, I signed all the paperwork and agreed to this being done. So far approx £5000 has been claimed, the debt company have taken a cut, the finance company have taken their cut and the rest is going to creditors. I have been told that the £5000 is taxable (the debt management company have not told me this). I received a cheque on Friday for £1800 as settlement on PPI from one of the creditors I have banked it and will ring the debt management company once it clears and pay it to them via my bank card. My question is, should I keep something back for the tax man, I dont want to end up where I owe HMRC as well, does anyone have any advice - sorry if this is a bit garbled, I have struggled to keep up with my IVA I want to pay my debts but am scared I will end up owing money for tax and have no idea how much, I work full time so pay tax on my earnings. Thanks in advance.
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The full £5000 isn't taxable - the only taxable bit is on interest included in your compensation
Hi Mary - tax is payable on the interest element of the compensation and you should have been told how much of the compensation is premiums and how much is interest. When you know what this figure is have a word with your local tax office
Don't worry, generally the breakdown of a PPI payout is your total refund +8% interest, the only part of the payout that is taxable is the +8% interest, as the other money being disbursed is a refund to you.
The 8% figure is the annual rate of interest. If the policy was several years old the interest figure could be a lot more- maybe 30% or more
Sorry to disappoint, but it's not an anunual interest rate, rather it's an agreed interest rate, which has been agreed between HMRC and banks as roughly the interest a customer would have received from having the PPI cost in a bank account for the term of the loan. This is as follows

You get a repayment back in three parts:

1. Refund of the actual payment protection insurance payments made
2. Refund of associated interest on the premiums
3. Payment of 8% statutory interest

The 8% statutory interest is the only part that is taxable. The reason you are repaid this interest is because this is what that money would have earned in a savings account had you not spent it on the policy. You would have paid tax on it anyway and in comparison to the full amount owed to you it should be a small amount.
Okay thanks nibble. I don't have any PPI claims. I just remember hearing the 8% interest figure and thinking it sounded rather generous given current interest rates. 8% overall sounds more realistic although I don't know why it couldn't be varied using a set formula- it seems some will do well out of it and others will lose out in real terms
The people doing well out of PPI refunds may well have had a lot of loans/cc's/etc all with PPI running on them - hence bigger refund of mis-sold insurances.

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