Guide to Financial Redress for Maladministration
Annex F: Example of a compound interest calculation when delay has lasted 10 years or more
- The two examples below show how compound interest is calculated in two theoretical cases where benefit was underpaid from 9 June 1988 to 13 March 1993 as a result of a Departmental error. £6,650 of benefit arrears were paid on 29 October 1999.
- There are three stages to the calculation of compensation for delay when the delay has lasted 10 years or more.
- In the first example, the indicator of delay of twelve months runs from 9 June 1988 to 8 June 1989, ending in the second tax year for which the arrears of benefit are due. Interest is payable for the period 9 June 1989 to 29 October 1999, the date of payment of the arrears. All three stages of the calculation are applied.
- In the second example, the indicator of delay of two months runs from 9 June 1988 to 8 August 1988. Interest is therefore payable for the period 9 August 1988 to 29 October 1999, the date of payment of arrears. In this second example the indicator of delay ends within the first year of the arrears and there is no Stage 1 calculation.
For both examples
- The arrears of benefit are divided into the tax years in which they were due, that is, within periods from 6 April to 5 April:
| Year | Arrears |
|---|---|
1988/89 |
£1,220 (arrears from 09/06/88 - 05/04/89) |
1989/90 |
£1,270 (arrears from 06/04/89 - 05/04/90) |
1990/91 |
£1,340 (arrears from 06/04/90 - 05/04/91) |
1991/92 |
£1,390 (arrears from 06/04/91 - 05/04/92) |
1992/93 |
£1,430 (arrears from 06/04/92 - 13/03/93) |
Total |
£6,650 |
First example: indicator of delay ends in the second tax year for which the arrears of benefit are due.
Stage 1: Interest from the end of the indicator of delay to the end of the tax year: factors at Annex G
Interest from 9 June 1989 to 5 April 1990
1. The Stage 1 calculation shown below is only required when the indicator of delay period ends in the second tax year.
2. It calculates interest on the first year's arrears only.
3. These arrears are treated as payable at the end of the indicator of delay period. The interest from that date until the end of the tax year is calculated by application of the Annex G factor.
| Stage 1 calculation: | ||
|---|---|---|
Arrears from 09.06.88 to 05.04.89 |
= | £1,220 |
Interest from 09.06.89 (day following the end of the indicator of delay) to 05.04.90 |
= | 10 months |
Annex G factor for 1989/90 |
= | 0.0640 |
Interest = £1,220 x 0.0640 x 10/12 |
= | £65.07 |
Stage 2: Interest for complete tax years: factors at Annex H
Interest from 6 April 1990 to 5 April 1999
4. The factors at Annex H are applied in respect of complete tax years after any period for which Stage 1 interest was calculated.
5. In this example, Stage 2 interest is calculated for the period from 1990/91 to 1998/99.
6. Arrears are treated as payable at the end of the tax year in which they were due. The application of the Annex H factor for the tax year in which the arrears were due calculates compound interest from the end of the tax year in which they were due.
Stage 2 calculation
7. To ensure that interest on the arrears for 1988/89 is compounded, the arrears and interest (from Stage 1) are added to the arrears for 1989/90 and multiplied by the Annex H factor for 1989/90. The calculation is continued as in the table below.
| Tax year to which arrears relate | Amount of arrears | Factor from Annex H | Compensation payable |
|---|---|---|---|
| 1989/90 (including Stage 1) | £2,555.07 | 0.4867 | £1,243.55 |
| 1990/91 | £1,340.00 |
0.3967 | £531.58 |
1991/92 |
£1,390.00 | 0.3584 | £498.18 |
1992/93 |
£1,430.00 | 0.2847 | £407.12 |
| Total | £6,715.07 |
— | £2,680.43 |
Stage 3: Interest for the final, incomplete, tax year at end of period: factors at Annex I
Interest from 6 April 1999 to 29 October 1999
8. Interest for part of the last tax year is calculated using the factors in Annex I.
Note: if the end of the period coincides with the end of a tax year, then there will be no Stage 3 calculation.
Stage 3 calculation
9. As, in this example, the arrears were paid after the beginning of the 1999 - 2000 tax year, it is necessary to calculate additional compensation for the months from April and October 1999, the month the arrears were paid. All the arrears to the end of the last complete tax year before the arrears were paid, in this example 1992/93, are added to the total amount of compensation arrived at in Stage 2:
| Arrears to the end of tax year 1992/93 | = | £6,650.00 |
|---|---|---|
| Compensation | = | £2,680.43 |
| Total payment due | = | £9,330.43 |
10. This total is then multiplied by the factor from the relevant column in Annex I and the amount obtained is added to the compensation from Stages 1 and 2:
£9,330.43 x 0.0193 (for October 1999 from Annex I) = £180.08
| Total compensation: | Stage 1 | £65.07 |
|---|---|---|
| Stage 2 | £2,680.43 | |
| Stage 3 | £180.08 | |
| Compensation payable | £2,925.58 |
This example is for illustrative purposes only.
Second example: indicator of delay ends in the first tax year.
Stage 1: When the indicator of delay ends in the first tax year there is no Stage 1 calculation
Stage 2: Interest from 6 April 1989 to 5 April 1999: factors at Annex H
11. The factors at Annex H are applied in respect of complete tax years.
12. In this example, Stage 2 interest is calculated for the period from 1989/90 to 1998/99.
13. Arrears are treated as payable at the end of the tax year in which they were due. The application of the Annex H factor for the tax year in which the arrears were due, calculates compound interest from the end of the tax year in which they were due.
Stage 2 calculation
14. The arrears are multiplied by the Annex H factor for the relevant year.
| Tax year to which arrears relate | Amount of arrears | Factor from Annex H | Compensation payable |
|---|---|---|---|
1988/89 |
£1220.00 |
0.5818 |
£709.80 |
1989/90 |
£1270.00 |
0.4867 |
£618.11 |
1990/91 |
£1,340.00 |
0.3967 |
£531.58 |
1991/92 |
£1,390.00 |
0.3584 |
£498.18 |
1992/93 |
£1,430.00 |
0.2847 |
£407.12 |
Total |
£6650.00 |
— |
£2764.79 |
Stage 3: Interest for the final, incomplete, tax year at end of period: factors at Annex I
Interest from 6 April 1999 to 29 October 1999
15. Interest for part of the last tax year is calculated using the factors in Annex I.
Note: if the end of the period coincides with the end of a tax year, then there will be no Stage 3 calculation.
Stage 3 calculation
16. As, in this example, the arrears were paid after the beginning of the 1999 - 2000 tax year, it is necessary to calculate additional compensation for the months from April and October 1999, the month the arrears were paid. All the arrears to the end of the last complete tax year before the arrears were paid, in this example 1992/93, are added to the total amount of compensation arrived at in Stage 2:
| Arrears to the end of tax year 1992/93 | = | £6,650.00 |
| Compensation | = | £2,764.79 |
| Total payment due | = | £9,414.79 |
17. This total is then multiplied by the factor from the relevant column in Annex I and the amount obtained is added to the compensation from Stage 2:
£9,414.79 x 0.0193 (for October 1999 from Annex I) = £181.71
| Total compensation: | Stage 1 | £0.00 |
| Stage 2 | £2,764.79 | |
| Stage 3 | £181.71 | |
| Compensation payable | £2,946.50 |
This example is for illustrative purposes only.