How does section 979A of the Income Tax Act 2007 treat FSCS compensation payments representing interest?

Section 979A treats FSCS compensation representing interest as if a gross payment had been made and income tax had genuinely been deducted from it. The recipient receives credit for the notional tax deduction, which is taken into account when calculating their overall income tax liability under self-assessment, potentially reducing tax owed or generating a repayment.

What is the relevant gross amount for FSCS payments under section 979A?

The relevant gross amount is the total of the actual FSCS payment representing interest plus the notional tax sum treated as having been deducted. For example, if the FSCS pays £800 net after a notional 20% basic rate deduction, the relevant gross amount is £1,000, comprising the £800 net payment and £200 notional tax.

Can recipients request a statement from the FSCS about their compensation payment?

Yes, recipients can make a written request to the FSCS scheme manager for a statement. The scheme manager must legally provide a document showing the relevant gross amount, the notional tax treated as deducted, and the net payment representing interest. This ensures recipients have the information needed to complete their tax return accurately.

How does a recipient's tax rate affect the treatment of notional tax deducted from FSCS interest payments?

Non-taxpayers may claim a full repayment of the notional tax. Basic rate taxpayers find the notional deduction covers their liability on that interest entirely. Higher rate taxpayers owe additional tax on the gross amount but still receive credit for the notional deduction, reducing the extra amount payable to the difference between the higher rate and notional deduction.

Income Tax Act 2007 section 979A

FSCS payments representing interest

Section 979A deals with the tax treatment of compensation payments made under the Financial Services Compensation Scheme (FSCS) that represent interest, ensuring recipients can account for notional tax deductions when calculating their tax liability.

Where the FSCS pays compensation calculated as if tax had been deducted from interest, the payment is treated as a net amount from which income tax has already been withheld
The notional tax deducted is taken into account when determining the recipient's overall income tax liability, meaning it can reduce tax owed or increase a repayment due
The "relevant gross amount" is the total of the actual FSCS payment representing interest plus the notional tax sum treated as deducted
Recipients can request a written statement from the FSCS scheme manager showing the gross amount, the notional tax deducted, and the net payment representing interest, and this obligation is legally enforceable

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