Newsflash - Taxman to tax compensation payouts

The Inland Revenue has made clear it expects investors who have received compensation to pay tax on their payouts.

In its latest monthly Tax Bulletin, the Inland Revenue makes clear that any payment in excess of a simple refund of the premiums paid, to compensate for any loss incurred, amounts to 'interest' and is therefore taxable. This interest is taxed at the normal savings rates of 20 per cent for basic rate taxpayers and 40 per cent for higher rate taxpayers.

For example, on a compensation payment of £15,000, of which £10,000 relates to past premiums, the taxman would expect tax to be paid on the additional £5,000, resulting in a tax bill of £1,000 for a basic rate taxpayer, and £2,000 for a higher rate taxpayer.

Nearly £1bn has been paid to 600,000 individuals for mortgage endowment mis-selling. However, compensation for personal pension mis-selling and personal injury are not taxable.

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