Tax officials have warned that people who receive compensation for mis-sold payment protection insurance will likely be liable for tax on some of the proceeds.
The news comes as several major banks confirmed they are increasing the money earmarked for paying out misselling claims. HSBC is now expecting to pay almost £300 million more than originally estimated.
The tax situation arises because the cash payments customers receive are made up not just of a refund of premiums they paid, but also an interest payment to cover the time that has passed since the original payment.
Her Majesty's Revenue and Customs has reiterated that such interest on compensation is taxable. The logic is that this part of the compensation payment is designed to replace the interest that the customer could have earned had they never paid the premiums and instead put the cash into a savings account. Such hypothetical savings interest would have been taxable.
Independent estimates suggest the total tax windfall for the government from such payments could run into hundreds of millions of pounds. HMRC says people should contact it if they are uncertain whether or how they should declare the compensation payments.