Do You Pay Tax on Car Finance Compensation?
Scheme status (updated 5 August 2026): parts of the FCA motor finance redress scheme are temporarily suspended while the Upper Tribunal considers legal challenges. Lenders do not currently have to calculate or pay compensation under the scheme, the original decision and payment dates no longer apply, and no payment under the scheme is guaranteed. If the scheme proceeds, first payments are expected in 2027 at the earliest. Any dates mentioned below were set before the suspension.
When millions of UK drivers receive car finance compensation under the FCA redress scheme (PS26/3), many will immediately ask whether HMRC will take a portion. This is one of the most commonly asked questions about the scheme and one of the least clearly answered anywhere. This page explains the current position.
The Short Answer
In most cases, car finance compensation payments will not be subject to income tax. The compensation restores money you overpaid — it is not income or a financial gain. However the interest element of your compensation is treated differently and may be taxable above certain thresholds.
Why Most Car Finance Compensation Is Not Taxable
HMRC distinguishes between compensation that restores you to the position you should have been in and payments that represent income or profit. The FCA hybrid remedy repays what you overpaid due to undisclosed commission arrangements — it is a restoration of loss, not earnings. Money that simply returns you to where you would have been had the mis-selling not occurred is generally not treated as taxable income.
This follows the same principle established for PPI compensation, where HMRC confirmed the refund element was not taxable because it represented money that should never have been taken in the first place.
The Interest Element — This Part May Be Taxable
The FCA hybrid remedy includes compensatory interest at Bank of England base rate plus 1% per year. This interest element is treated differently from the main compensation amount.
Under HMRC rules, interest paid as part of compensation is generally taxable in the same way as bank interest. However most individuals receive this within their Personal Savings Allowance:
Basic rate taxpayers: £1,000 Personal Savings Allowance — interest below this is tax-free
Higher rate taxpayers: £500 Personal Savings Allowance
Additional rate taxpayers: No Personal Savings Allowance — all interest is taxable
For most recipients the interest element of their car finance compensation will fall well within their Personal Savings Allowance and no tax will be owed. For higher earners receiving large compensation packages across multiple agreements, the interest element may need to be declared on a Self Assessment return.
HMRC Has Not Published Specific Guidance Yet
At April 2026, HMRC has not published specific guidance on car finance redress. This is not unusual — HMRC typically waits until payments are actually made before publishing specific guidance, as happened with PPI. When payments begin in late 2026, HMRC guidance is expected to follow. Until then, the general principles above apply.
If you are a higher or additional rate taxpayer receiving above-average compensation, speak to a tax adviser before assuming no liability exists.
What You Should Do
For most people — basic rate taxpayers receiving around £829 — there is likely nothing to do. The interest element will fall within your Personal Savings Allowance and no tax will be due.
Keep the payment confirmation letter from your lender. It will typically show the breakdown between the refund element and the interest element — exactly what is needed if you are required to declare anything on a Self Assessment return.
Related Pages
Will Compensation Affect My Benefits?
Frequently Asked Questions
Will HMRC automatically know I received car finance compensation?
Lenders are not required to report individual PS26/3 redress payments to HMRC through any standard reporting mechanism. If you are in Self Assessment, you are responsible for declaring any taxable amounts — specifically the interest element if it exceeds your Personal Savings Allowance.
I am a non-taxpayer. Is any of my compensation taxable?
Non-taxpayers have the same £1,000 Personal Savings Allowance as basic rate taxpayers. In practice, almost all non-taxpayers will have no tax liability on car finance compensation.
The compensation is going to my Official Receiver because I was bankrupt. Is it still taxable?
If compensation is paid to your Official Receiver or insolvency practitioner rather than to you personally, the tax position is handled as part of the insolvency estate. You should not have a personal tax liability on money you did not receive.
You will be redirected to our partner’s website to complete your claim.
Think You May Have a Motor Finance Claim?
The FCA estimates average compensation of around £830 per eligible agreement, but eligibility and payment amounts vary. Some customers may receive nothing. Complaints about agreements started from 1 April 2014 should be submitted by 30 June 2026 to be considered under the earlier timetable. Different dates apply to older agreements. The scheme is currently subject to legal challenge, so dates and payment timings may change.
