PPI customers will be reimbursed the total value of all premiums plus 8% interest.
The bank said it was the first to pay out PPI compensation on a “no-quibble” basis.
The move comes after the banking industry lost its April High Court challenge to the new rules on the sale of PPI. The rules were imposed last year by the Financial Services Authority and the Financial Ombudsman Service.
After losing the case, Lloyds Banking Group set aside £3.2bn to cover the cost of this compensation, followed by £1bn from Barclays, £850m from the RBS and £269m by HSBC.
Peter Vicary-Smith, chief executive of Which?, said: “Banks have a lot to do to re-build their reputation after over a decade of mis-selling PPI and then mishandling complaints about it.
“It’s fantastic to see Barclays stepping up in this way, acknowledging their mistakes and refunding customers what they’re owed, no questions asked. Hopefully this will have a domino effect and other banks will follow suit – the sooner the banking industry can consign the PPI mis-selling scandal to the history books, the better.”