How to Claim Tax Back on Your PPI Refund
If you have received a Payment Protection Insurance (PPI) payout in the last four years (since 6th April 2020) due to being mis-sold the financial product, or if you are currently still waiting to find out if you are going to get a payout, you could be owed more money again due to tax – up to £100s in some cases.
In this guide, we help explain all you need to know about the tax that is deducted from PPI payouts, how much you could be owed as a result and how to go about claiming the tax back on PPI payments.
Mainly between the years of 1990 and 2010, Payment Protection Insurance was a type of policy sold to help people cover any loan or credit card repayments for up to a year if the policyholder ever fell ill, had an accident, lost their job, had a disability or died.
Unfortunately, this policy was mis-sold to millions of people in the UK who took out loans, credit cards, mortgages and car finance deals (64 million policies were sold altogether) and since this has come to light, over £38.3 billion has been paid back to people who complained and made a claim for a compensation payout, according to the Financial Conduct Authority (FCA).
The deadline for people to make PPI complaints and claims was 29th August 2019, as set by the FCA, so people are not able to claim money back for mis-sold PPI anymore, unless your situation falls under the ‘exceptional circumstances’ outlined out by the Financial Ombudsman Service.
For people that have already had their PPI payout though, they may be entitled to claim some, if not all, tax back, and the bigger the PPI payout they received, the more tax they should expect to get back.
To claim, either visit the GOV.UK website to complete the necessary R40 form or get in touch with a PPI tax reclaim specialist who can help do the hard work for you.
PPI compensation payouts explained: A breakdown
If you have received a PPI payout, it will consist of 3 main parts:
1. A refund for the PPI premiums that you paid.
2. A refund for any interest you were charged on top of those premiums (many banks added an extra loan on top of your original loan to pay for the PPI, so they charged you interest on top of this).
3. You receive 8% statutory interest on the total amount of compensation (i.e. the total amount of points 1 and 2 above) for every year since you bought the PPI policy.
What is statutory interest?
Statutory interest is included in the total compensation to account for the fact that the bank wrongfully took your money and left you in a worse situation than before taking out a PPI policy. So, the aim of statutory interest is to help you get back to the position you were in before you were mis-sold the PPI.
PPI payouts and tax
Out of the three main parts listed above, only statutory interest is subject to tax because it is seen as a type of ‘savings income’ for tax purposes (as if you’d earned interest on savings).
This should be displayed on your payout statement when you received it (if not, contact the company who you made the claim with and ask for a certificate with this information) and the tax will be applied in the same tax year that you get your payout (the time when you first took out the policy doesn’t matter).
If tax is owed on your PPI payout, it is deducted automatically at the basic rate of 20% before you receive the payout, which, of course, can be a problem for non-taxpayers.
As the tax is automatically deducted from the payout at 20%, you essentially pay £20 for every £100 of statutory interest that you earn.
PPI interest – Am I owed tax back from this?
On 6th April 2016, the ‘personal savings allowance’ was introduced, which meant that the majority of taxpayers could earn up to £1,000 in interest on savings every year, without having to pay tax on it.
So, this means that if the total of your PPI interest and the interest on any other savings income you have for the year is within your personal savings allowance, or if your total taxable income is within your tax-free personal allowance (£12,500 in 2020/21), you should be able to claim some, if not all, of the tax back that was initially deducted from the payout.
For any PPI payouts that were paid out before 6th April 2016, it is not possible to reclaim any tax paid, as you can only claim tax back from a PPI payment as back as four tax years. We are currently in the 2020/2021 tax year, so you can reclaim tax as far as the 2016/2017 tax year – either by completing the government’s R40 form or by contacting a tax reclaim specialist.
Reclaiming tax on PPI payouts after 6th April 2016
For people who were non-taxpayers during the year that they received their PPI payout (those who were earning less than the personal allowance of £12,500 per year), they will be able to claim all of the tax back, unless the statutory interest makes you go over the taxpaying threshold.
Since 6th April 2016, the personal savings allowances for the majority of taxpayers is as follows:
- Those earning between £12,500 and £50,000 who pay the basic tax rate of 20% can earn £1,000 interest in a year, tax-free.
- Those earning a higher salary of between £50,000 and £150,000 have to pay a higher rate of 40% and can earn £500 interest in a year, tax-free.
- Those earning more than £150,000 must pay 45% tax but are not entitled to a personal savings allowance.
If the total amount of interest you have earned from both your own savings and PPI statutory interest is less than your personal savings allowance, you will be able to get all of the PPI tax paid back to you.
If, however, the total falls over your personal threshold, you will need to pay tax on the amount remaining after the threshold.
For example, if a basic rate taxpayer (20%) earned £450 on their savings in 2018 and their PPI payout included £1000 statutory interest in the same year, their total interest for 2018 would be £1,450.
As a basic rate taxpayer, this amount exceeds the £1,000 personal savings allowance tax-free threshold by £450, so they would need to pay 20% tax on the remaining £450, which is £90.
PPI tax refund – How to reclaim the tax back
If you’ve received a PPI payout and you think you are owed tax back, there are two ways in which you can apply to claim any tax paid on your PPI refund.
- Complete an R40 form from HMRC (or R43 form if you are living abroad) – Also known as the ‘Claim a refund of Income Tax deducted from savings and investments’ form.
- Contact a PPI tax claims expert to handle the claim for you.
It all depends on how you wish to try and claim the tax money back, but generally, the HMRC forms can be quite complicated, as stated by Martin Lewis on MoneySavingExpert, and can take a significant amount of time to complete, particularly for people who pay tax via their employee’s PAYE, making the whole process pretty stressful and long-winded from start to finish.
To save time and to make life easier, get in touch with a trusted tax reclaim specialist and they will be able to help simplify the process for you by handling the tax refund on your behalf.