If you’ve received a refund for any incorrect charges and fees, you might have also received payment to compensate for interest earned if the fees hadn’t been charged. 

This compensatory interest payment is calculated at 8% per year and is paid gross or net, depending on your business type.

Depending on your individual circumstances, there could be additional tax requirements around this type of payment.

In line with HM Revenue & Customs (HMRC) guidance, we deduct 20% income tax from any compensatory interest payments made to individual customers, as detailed in the example table below.

Example calculation

 DescriptionAmount
ARefund of charges and fees£100.00
B8% gross compensatory interest payment£8.00
CIncome tax deducted from the compensatory interest at 20% (20% of B)- (£1.60)
DNet compensatory interest payment (B – C)£6.40

Your account will be credited separately with any refunds of charges and fees (A) and any applicable net compensatory interest (D) with references to help you identify each payment.

If you're required to fill in a Self-Assessment Tax Return, you'll need to report the compensatory interest payment.

If the total amount of interest that you receive in any tax year exceeds any Personal Savings Allowance you’re entitled to, you may have additional tax to pay. If the total amount of interest that you receive in any tax year doesn’t exceed your Personal Savings Allowance, you may be able to reclaim the tax deducted. Any additional tax payments or reclaims for refunds of tax will need to be directed to HMRC. Further information is available on www.gov.uk, by searching for ‘Personal Savings Allowance’.

Compensatory interest is paid gross to businesses such as limited companies, limited liability partnerships and clubs, societies and charities. It will be paid into your business current account, as detailed in the example table below.

Example calculation

 DescriptionAmount
ARefund of charges and fees£100.00
B8% gross compensatory interest payment£8.00

Your account will be credited separately with any refunds of charges and fees (A) and any applicable gross compensatory interest (B) with  references to help you identify each payment.

Compensatory interest paid into your business account may be taxable and may be reportable to HMRC.  For further information you should contact an independent tax adviser.

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