How to Claim Tax Back On PPI Interest

how to claim tax back on ppi interest

Most banks refunding PPI now take off tax from your PPI refund. Here is how to claim back tax back on PPI interest.

If you are one of the millions of people who has received a refund for mis-sold PPI you may have been surprised to see that that some tax was taken off. “But this is my money I am getting back – why should I have to pay tax on it?” is a common thought!

You may be able to get some of this money back, and if you are on a low income or don’t pay any tax, you should be able to get it all back.

Why Have You Been Charged Tax on A Refund?

PPI refunds are usually made of three components:

  1. a refund of the PPI premiums you paid, plus
  2. a refund of interest you were charged on the PPI premiums (sometimes called “associated interest”), plus
  3. statutory interest at 8% (sometimes called “statutory compensation” or “simple interest”).

The two “refund” elements are indeed your own money that is being returned. That isn’t taxed at all.

If you finished paying the loan or credit card that PPI was added to sometime ago, then the extra interest you were charged on the PPI stopped at that point.

But you are still out of pocket because of the amounts you had previously paid – if that money had been sitting in your bank account you would have been earning interest on it.

So statutory interest at 8% for each year is added to your refund as compensation from this point on. This element can be very large if the PPI was paid many years ago.

The tax man treats this statutory interest as though it is interest you have earned from your savings.

This doesn’t just apply to PPI refunds. If you have received any financial compensation, such as a payday loan refund, that may include an 8% statutory element and that too is taxed as though it is savings.

Guessing at Your Tax – And Guessing Wrong!

Most banks refunding PPI now take off tax from this element. But of course, they don’t know how much tax you pay or if you are getting other refunds in the same tax year, so they assume you are a basic rate tax payer and deduct 20%.

Because the government is trying to encourage people to save, it introduced a new tax-free savings allowance in April 2016 for everyone – this is £1000 for basic rate taxpayers and £500 for higher rate tax payers. People on a low income also benefit from paying 0% tax on some savings.

As a result, the tax deducted is wrong for almost everyone! All basic rate and non-tax payers may be able to reclaim some of this.

You can ask HMRC for a refund of some or all this tax deducted. Unfortunately, if you are a higher rate taxpayer, you may have some extra tax to pay.

How Much Tax Should You Pay on This?

how to claim tax back on ppi interest

Most people in the 2018-19 tax year:

  • won’t pay any tax on savings if your total income (which includes this 8% interest) is less than £16,850. In this case you should get all the tax deducted back.

  • If your total income is more than £16,850 and you are a basic-rate taxpayer, the first £1000 of savings interest you receive in the tax year is tax free. In this case you should get up to £200 of any tax deducted back. This is across all refunds you get, it’s not £200 per refund.

  • for higher rate taxpayers this allowance is reduced to £500. 40% of that is also £200 so you may be able to claim that back BUT you may also have to pay some extra tax as tax has only been deducted at 20% not 40%.

How to Claim Tax Back On PPI Interest

You only report the amount of the 8% interest and the tax that has been deducted to HMRC. You don’t need to report the other “refund” parts of the PPI payment you have received because they aren’t taxable.

If you fill in a self-assessment tax form, for example if you are self-employed, then getting the rebate is easy. You just enter the details of the 8% interest part of the PPI refund on your tax return as “savings interest” and put in how much tax was deducted from this.

If you don’t complete a tax return, you ask for a refund using the R40 form. This can done online if you have a Government Gateway Id or by filling out a paper form. 

This looks a bit like a tax form, but the Notes for the Form are clear and, if you are only completing because a refund has been incorrectly taxed, most of it isn’t relevant.

You can make “an interim claim” during the tax year but you will have to estimate all your earnings for the whole year. I think it’s simpler to wait until the tax year ends and then then claim when you know all the figures.

You can also claim for previous tax years 2016-17 and 2017-18. You need to send in a separate claim for each tax year.

Pin For Later

how to claim tax back on ppi interest

how to claim tax back on ppi interestThis is a guest post by Sara Williams. Sara is a debt adviser. She blogs at Debt Camel about everything to do with debt and credit ratings, from mortgage applications to payday loan refunds.

 

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