Part of every refund for any mis-sold loan cover will be taxed by the Government as the wait for compensation goes on.

A fifth of the compensation being paid to bank customers mis-sold payment protection insurance is being taxed, earning the Exchequer as much as £350 million, experts estimate.

Millions of those who have received, or who are waiting for, PPI payouts may not realise that they owe hundreds of pounds in tax.

Following a High Court ruling earlier this year, banks have been forced to repay in full customers sold unnecessary or unsuitable payment protection cover, designed to insure loan or credit card payments in the event that they were unable to work.

Compensation is expected to total £9 billion as a result of the mis-selling, with banks already having paid out £600 million.

Customers who believe that they have been mis-sold PPI can demand refunds of up to six years’ worth of payments, plus 8 per cent interest for the time that the bank wrongfully kept their money. While the refund of the payments made for the insurance is not taxable, the 8 per cent interest is.

On the basis that the average PPI claim is for three years of mis-sold insurance, and the average payout is £1,000, it’s estimated that the average claimant will receive £240 in interest for the three years, or a fifth of the overall payout.

The interest is taxed at the claimant’s usual rate — 20 per cent for the majority of claimants on the basic rate of income tax. Therefore, on each average claim, the Government will get about £48. This figure is much higher for those receiving enormous payouts.

Martin Lewis, of MoneySavingExpert.com, who has campaigned on the issue of PPI for years, says that just this week he has heard of two people who have received payouts of more than £10,000, with one of £16,000. The latter claimant will owe about £768 to the Government if he is a basic-rate taxpayer. He will owe £1,536 if he is a higher-rate taxpayer.

Mr Lewis says: “If the banks pay up in full my suspicion is that the Government could get at least £250 million in tax; a very rough estimate shows that it could be £350 million if the full £9 billion is paid back to consumers. Had people not been mis-sold PPI in the first place, though, that is £9 billion that could have been out of the hands of the banks and in the economy.”

Only two banks, RBS and NatWest, will deduct basic-rate tax before paying compensation, so if you are a higher-rate taxpayer you will need to contact HMRC to top it up. Barclays, Halifax, HSBC, Lloyds TSB and Santander will pay you the full amount and leave the tax payment up to claimants.

The majority of people making a claim will be on a PAYE tax system, so will not usually complete self-assessment tax forms. A spokesman for HMRC says that the best thing to do is contact Revenue & Customs if you are unsure of how to pay what you owe.

He adds: “No tax is generally due on the repayment element of compensation paid to those mis-sold PPI. However, the additional interest is taxable in line with other compensation claims. Nobody should be worse off, as had the customer not purchased PPI, but kept that money in an interest-bearing account, the interest received would have been taxable.

“Customers should check with their PPI provider as to whether tax has been deducted at source. They should let us know if it has not been deducted and we will send out a very short, simple form called a P810 to submit.”

This confusion over how to pay tax comes as more and more of those who have already submitted claims for repayment complain that banks are stalling on paying them at all, despite promising that they would receive their money within 28 days.

Kerri Roberts has been waiting 80 days for her refund. She says: “It’s been 16 weeks since I received my calculation letter in August and I’ve still not had my payment. I have called Lloyds TSB two to three times a week since September to find out when my refund will be paid. I’ve also involved my MP, who was told that the refund was transferred to my bank account on November 22, but I still haven’t received this. The complaints call centre cannot give me a timeline and I have exhausted all avenues.”

Noel Haynes and David Jeffree have had similar experiences. Mr Haynes has been waiting five months for his payout and says that he has been given no clear indication of when he will receive the money. He says: “I have a Lloyds bank account and when I asked why it couldn’t be paid straight into my account, rather than be issued with a cheque, I was told that would send me to the back of the queue, meaning another indefinite wait. I am sure if this was the other way round Lloyds would not be happy to wait five months and still not have an answer.”

Mr Jeffree is waiting for more than £10,000 from Lloyds. He says he has called every week since September, when his offer was made, for an update on progress and “information has been sparse, inconsistent and usually constitutes being fobbed off”.

He adds: “The irony of this is that the money Lloyds owes me is enough to pay off my Lloyds TSB loan and Lloyds TSB credit card, for which the bank is now chasing me for payment. It takes less than 49 working days to co-ordinate chasing me for debts, but not for money owed to me.”

A spokesman for Lloyds says: “The vast majority of our customers are receiving PPI payments well within the FSA’s payment guideline. We appreciate that some customers have waited more than our standard 28 days to receive their PPI payment, we would like to apologise to those customers for the inconvenience they have experienced. We are calculating these refunds with appropriate interest to ensure these customers are compensated for the additional delay.”

Louise Hanson, head of advocacy for Which? said: “The PPI judicial review has caused a huge backlog and the banks are struggling to make quick payouts. Banks should be doing better.

“We need the FSA to be strong and crack down on any bank that doesn’t pay up promptly. They also need to be transparent in their approach and name and shame banks who are slow to pay up.

Mr Lewis agrees: “The problem is banks are not giving customers realistic estimations of when they will receive their money. They need to manage customers’ expectations — many claimants are desperate for the money, sometimes to pay off other debts. Banks must also make sure they make good any missed interest from the delay period for leaving people in the lurch.”