PPI Tax: The Ultimate Guide
If you received a PPI refund, it’s likely that tax may have been deducted. Fortunately, as of April 2016, taxpayers can claim this back from HMRC. This article will guide you through the process so that you can successfully make a claim should you feel you’re entitled to money back.
What's On This Page?
Click the links below and head straight to a specific section of the article.
- Why Is There Tax On The PPI Payout?
- Here’s Why You May Be Owed Tax Back on PPI Payouts
- How Much Can You Claim Back?
- What If You Have A Low Income or Don’t Pay Any Income Tax
- How Do I Claim Tax Back from PPI?
- How Long Does it Take to Receive PPI Tax Refund?
- How Long Do I Have to Claim Back the Tax on my PPI Pay-out?
Why Is There Tax On The PPI Payout?
If you were to return something you had bought from a shop, you wouldn’t expect tax on your refund. However, if there had been an extra 8% interest added to that refund, then it can be classed as taxable.
HMRC explains that most lenders deduct at the rate of 20% from the 8% interest and send that tax onto HMRC. The 8% interest sum would be labelled ‘interest gross’ and ‘‘interest net’ is the 20% tax being taken off the interest gross.
Here is an example:
8% Interest Gross: £481.27
20% Basic Rate Tax Deduction Off Interest Gross: £96.25
8% Interest Net: £385.02
Total Sum: £1,898.08 (£1,513.06 + £385.02)
Here’s Why You May Be Owed Tax Back on PPI Payouts
If tax is due on PPI payouts, most firms deduct it automatically, at the basic 20% rate before you receive the money.
But since the 6th April 2016, more people have been owed tax back, due to the launch of the personal savings allowance. This allows most taxpayers to earn up to £1,000 a year of savings interest tax-free.
While most savings interest has been paid ‘gross’, meaning without any tax being taken off, PPI still has 20% automatically deducted.
Therefore, seeing as PPI is taxed as a lump sum payment when paid, most people who have paid tax on it since then are entitled to some of the money back.
How Much Can You Claim Back?
This will depend on whether you pay income tax and at what rate. If you are near the top end of the tax band, the 8% increase may move you into the next band.
If you are unsure about your specific calculations, it's better to seek advice from a tax professional to work out how much you are owed.
You can see how much tax was deducted from your PPI pay-out on the Final Response Letter (FRL) which you should have received from your bank or lender.
What If You Have A Low Income or Don’t Pay Any Income Tax
If you have a lower income of less than £18,500 including the 8% on your refund, then your refund is tax-free, meaning you should receive a refund of all the tax deducted.
How Do I Claim Tax Back from PPI?
You can claim a tax repayment on your PPI interest by using the R40 form or a form R43 if you’re living abroad. You can either do this online or print and complete the paper form and send by post. Here are a few things to look out for:
At the very top of the postal form, you must put your name and address and the tax year you received the PPI payout.
Where it says enter your agent's details, that just means your accountant if you have one. If not, you can leave it blank.
Box 1 is for your personal details. You must make sure these are correct, especially your national insurance number. Once filled, check it over because if you get this wrong, it will be rejected.
Box 2 is where you fill in details about your income. This notifies HMRC whether you were a non-taxpayer, basic rate or higher rate.
You can find that information on your old P45 or P60. If you don't have it, contact your old employer in the year you are claiming tax for.
Box 3 is where you enter the details of the interest earned (ie, the statutory interest on PPI and interest on any other savings).
Box 3.2 is where you detail the tax taken off the statutory interest part of the PPI payout.
Read through boxes 4 to 10. It’s likely you won’t have anything to fill in here – but double check just in case, and fill in if you do.
Fill in the repayment instructions in box 11 and sign box 12.
Please note if you had more than one PPI payout in a different tax year, you'll need to do a separate form for each.
There are instructions on the form but they cover a wide range of situations so can seem a bit overwhelming. Hopefully the above will help simplify things a little.
How Long Does it Take to Receive PPI Tax Refund?
HMRC is quite efficient in dealing with PPI tax refund claims and usually responds within 5-6 weeks to a claim so long as the information provided is accurate.
How Long Do I Have to Claim Back the Tax on my PPI Pay-out?
Normally you have up to 4 years from the end of the tax year in which you received the PPI pay-out to make a claim on the tax deducted. So for example, if you received your PPI refund in 2019/20, then you have until 5th April 2024 to submit a claim.
Unfortunately, you can't reclaim tax on payouts received before 6 April 2018
Hopefully, by now you should have a better idea of how to claim back tax on PPI. Fortunately, we also offer a quick, easy way to claim back the tax on PPI pay-outs. All you need to do is click the button and enter a few details and we’ll take care of the rest.