Last updated: 14 October 2026
Is bank compensation for mismanaging your account taxable?
Compensation that puts you back where you would have been, such as a refund of wrongly charged fees, a payment for distress and inconvenience, or redress for a mis-sold product, is not taxable. Interest added to compensation to cover the time you were out of pocket is taxable as savings income. For PPI and some other redress, banks deduct 20% tax from statutory interest, which you can reclaim if you’re not liable. If the compensation replaces lost interest on savings, that element is taxable too.
How different payments are treated
| Payment from the bank | Taxable? |
| Refund of wrongly charged fees or charges | No |
| Payment for distress or inconvenience | No |
| Refund of PPI premiums | No |
| Statutory interest on refunds (8% a year) | Yes, savings income |
| Compensation for lost interest on savings | Yes |
| Redress for a mis-sold investment (restoring capital) | No income tax; may affect CGT cost |
| Goodwill gesture | No |
Business accounts
If the account is a business account and the compensation refunds charges you deducted as business expenses, the refund is taxable as business income. Compensation for lost profits is also taxable as trading income. Distress payments to a sole trader personally are usually not taxable.
Example
Tariq’s bank wrongly charged his personal account £850 in overdraft fees over 3 years. After a complaint, it refunds the £850, pays £200 for distress and adds £140 of interest. The £1,050 isn’t taxable. The £140 is savings income, but it falls within his £1,000 Personal Savings Allowance, so he pays nothing. If the bank deducted £28 tax from the interest, he can reclaim it.
Reclaiming tax deducted
- Through Self Assessment if you file a return
- Using form R40 if you don’t
- For PPI interest, by phone or in your personal tax account
You can claim back up to 4 years after the end of the tax year the interest was paid.
Financial Ombudsman awards
Awards made by the Financial Ombudsman Service follow the same rules: the compensation element is tax-free, and any interest element is taxable.
Common mistakes
- Treating the whole payment as taxable income
- Not reclaiming 20% tax deducted from interest
- Forgetting that refunds of business charges are taxable
- Overlooking interest in the year it was paid
Records to keep
Keep the bank’s final response letter, which should split the compensation, refund and interest, and any tax deduction certificate.
Compensation from a bank failure
If a bank fails and the Financial Services Compensation Scheme repays your deposits, the repayment of capital is not taxable. Interest the bank owed you up to the date of failure, which the FSCS includes in its payment, is taxable savings income in the usual way. Keep the FSCS payment letter showing the split between capital and interest, as you may need it to complete a tax return or to claim back tax.
Frequently asked questions
Do I need to tell HMRC about compensation?
Only the interest, if it’s taxable and not covered.
Is a switching incentive taxable?
Usually not.
Does compensation affect benefits?
It may count as capital for means-tested benefits.
What about fraud refunds?
Refunds of stolen money aren’t taxable.
Related: tax deducted from interest, UK tax on a payout and building society bonuses.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with compensation and refunds. See our tax refund accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
