Millions of people who were mis-sold payment protection insurance (PPI) will be taxed on their compensation.

HM Revenue & Customs has stated that while no tax is due on the compensation element of the payouts, the 8 per cent back-dated interest people are receiving will be taxable.

Compensation

Around 6.4 million people were mis-sold PPI when bank advisers – working for a hefty commission – pushed this product to people such as pensioners, the self-employed and stay-at-home mothers who would never be able to claim on the policies.

After a lengthy campaign earlier this year, the High Court ordered the banks to pay out compensation. The banks have set aside £6 billion to cover claims.

As a result of the decision to tax the interest, the Treasury should rake in £350 million.

This was written for our sister website, Moneywise