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Example where loan and PPI still in existence

Ms G took out a 5 year loan from her bank of £20,000 in 2007 and at the same time took out payment protection insurance (PPI) in case she was unable to meet the loan repayments. »Ê¹ÚÌåÓýapp PPI premium was £3000 and was added to the loan balance so her total borrowing was £23,000. By the time her complaint was upheld she had made four years of repayments of £500 a month of which £70 was for the PPI premium and historical interest on the PPI and her loan balance was £5800.

»Ê¹ÚÌåÓýapp bank put Ms G in the position she would have been if she had not taken out the PPI. »Ê¹ÚÌåÓýapp loan was restructured so that any amounts payable by Ms G in respect of the PPI (including any historical interest and charges) were cancelled. »Ê¹ÚÌåÓýapp bank also made sure that the number and amounts of any future repayments are the same as would have applied had Ms G taken out the loan without PPI.

• »Ê¹ÚÌåÓýapp bank repaid Ms G the PPI payment of £70 which included the premium and historical interest for the months she had paid it - total amount refunded was £3360 (70x48). This amount was credited to her loan so she had less to pay in the final year
• Ms G’s loan balance for the last year of the loan was recalculated to exclude the PPI premium for that year.
• Once it had done this calculation the bank paid Ms G 8% interest on the premium and historical interest refund of £3360. »Ê¹ÚÌåÓýapp amount of interest paid was £269

»Ê¹ÚÌåÓýapp repayment of the premium and the refund of historical interest are not taxable because they are refunds of amounts paid by Ms G. »Ê¹ÚÌåÓýapp interest of £269 paid by the bank at 8%, in respect of compensation, is taxable on Ms G. »Ê¹ÚÌåÓýapp interest is paid by a bank so tax will be deducted from the interest. Ms G should declare the interest to HMRC or include it on her tax return. You can access guidance on how to do this from the Dealing with HMRC pages on GOV.UK.