Tax On Compensation Claim

[meglet]

A few years ago I invested my pension pot in an overseas development company (I know, I know). The company then fell into huge financial difficulties, but is till trading - although it is extremely unlikely I will ever see any return from my investment.

I joined a class action to claim misselling on the part of the financial advisor and have just found out that the Financial Services Compensation Scheme has approved my claim and a cheque is winging its way to me. Thankfully this will fully compensate for my loss.

Am I liable to pay tax on it? I'm a high rate tax payer and have had to do a self assessment for the past couple of years so I'm unsure if I need to declare it.

Thanks.

[fiction-factory]

It depends. You will probably have to declare any interest element included in the compensation. If the compensation is a repayment of lost savings then there may be an issue of whether you got tax relief on your contributions. If the compensation is in lieu of benefits you would have got then again the money may have to be declared.
If the compensation letter doesn't cover tax issues (it should I think) then only the tax man can tell you for sure

[meglet]

Thanks.

//You will probably have to declare any interest element included in the compensation//

Tricky one this I think, as the total loss the FSCS has calculated was £63k but the compensation is limited to £50k. I need to check the paperwork again, but I believe there was a small element of interest within that £63k (£400 ish) so I don't know how HMRC would then calculate the interest part on the reduced amount of £50k coming to me. Also I have to pay 15% + VAT to the law firm so I won't get the full £50k.

(The reason I said I was fully compensated as I actually only invested £36k but the pension fund my money was in had done so well since I took my money out that that the FSCS said my pension fund value would have been £63k if I'd have left the money where it was).

[fiction-factory]

I should have added that it seems like one of those cases where the 'devil is in the detail'. It'sll be difficult to answer unless someone here has experience of this same case in the same circumstances or unless you can tell us what, if anything, the letter detailing the compensation says about potential tax issues

[fiction-factory]

Crossed posts. I certainly think the interest element of £400 ish would have to be declared.

[meglet]

Thanks f-f. I'll pop back with the exact figures later and see if it becomes any clearer.

[ubasses]

When I received compensation over misselling from the NHFA the cheque came with a covering letter explaining exactly what had to be declared to the tax office. Hopefully you will receive something similar.