Is Mis-Selling Compensation Taxable?

How compensation for a mis-sold pension or investment is treated for tax: money paid back into a pension, cash paid instead, interest on the award, and Capital Gains Tax.

Is mis-selling compensation taxable?

It depends on how the compensation is paid. Compensation paid back into a pension is treated as part of the pension rather than as income, and cash paid instead is normally reduced to allow for the income tax you would have paid on the pension. Interest added to an award is taxable, and basic-rate tax is usually deducted before you are paid. Whether Capital Gains Tax applies depends on when the advice was given. Source: HMRC CG13080, CG13083 and SAIM2340; Financial Ombudsman.

Last reviewed 27 October 2026. This is general information, not tax advice.

Compensation paid back into your pension

Where possible, pension compensation is paid into a pension to put you back where you should have been. It then becomes part of the pension and is taxed in the normal way when you take money out, rather than being taxed as income when it is paid.

Compensation paid to you as cash instead

If the money cannot go into a pension, for example because of allowance limits, it may be paid to you directly. In pension complaints, the Financial Ombudsman's usual approach is to reduce a cash payment to allow for the income tax you would have paid if you had drawn the same amount from a pension, taking account of the tax-free part.

Interest added to an award

The Financial Ombudsman often adds 8% simple interest a year to an award. Interest is taxable as savings income. The firm should deduct income tax at the basic rate, pay it to HMRC and give you a tax deduction certificate. If you are not a taxpayer you can usually claim it back from HMRC, and if you pay tax at a higher rate you may owe more.

There is a narrow exception: for compensation under the original pension review, interest up to the date the amount is agreed or determined is exempt (HMRC SAIM2340).

Capital Gains Tax

Section 148 of the Finance Act 1996 exempts compensation for pension advice given at least partly between 29 April 1988 and 30 June 1994, the original pension review period (HMRC CG13083). Most claims today concern later advice, which HMRC deals with under its general rules on compensation (CG13080). Whether any Capital Gains Tax is due depends on your circumstances. Firms do not deduct Capital Gains Tax for you, so if it may apply you will usually need to report it through Self Assessment.

Frequently asked questions

Do I pay tax on mis-sold pension compensation?

Not usually on compensation paid back into your pension, because it becomes part of the pension and is taxed in the normal way when you draw it. If it cannot go into a pension and is paid to you as cash, the Financial Ombudsman's usual approach reduces it to allow for the income tax you would have paid on the pension income. Interest added to an award is taxable as savings income.

Why was basic-rate tax taken off my compensation?

Firms must deduct income tax at the basic rate from interest they pay on an award, such as the 8% simple interest the Financial Ombudsman often awards. They pay it to HMRC and should give you a tax deduction certificate. If you are not a taxpayer, you can usually claim it back from HMRC. If you pay tax at a higher rate, you may owe more.

Is there Capital Gains Tax on mis-selling compensation?

Sometimes. A statutory exemption in section 148 of the Finance Act 1996 covers compensation for pension advice given at least partly between 29 April 1988 and 30 June 1994, the original pension review period (HMRC CG13083). Other compensation is dealt with under HMRC's general rules on compensation (CG13080), so the answer depends on your circumstances. Firms do not deduct Capital Gains Tax for you.

Do I need to tell HMRC about my compensation?

If you pay tax at a higher rate, or if Capital Gains Tax may be due, you will usually need to tell HMRC, for example through a Self Assessment return. Keep the firm's decision letter and any tax deduction certificate. HMRC or an accountant can confirm your own position.

Sources

Talk to us

We can tell you whether you may have a claim, but we cannot advise on your own tax position; HMRC or an accountant can. Free assessment on 01228 272 395 or start your claim online. Related: how compensation is calculated, SIPP mis-selling, DB pension transfer claims.