Martin Lewis: Had a PPI payout? If so, you can reclaim the tax on it
If you're one of the millions of people who've shared in the £34,000,000,000 of PPI repaid (so far), you may have paid tax you didn't need to. If so, and your payout happened in the last four years, you are due this money back.
For those who haven't reclaimed PPI yet – get a move on. The deadline on starting a claim is 29 August. If you've had a credit card, loan, mortgage, overdraft or car finance in the last 20 years, check if it had PPI. If so and it was mis-sold, you needn't pay anyone to reclaim – there's full help and a tool to do so for free in our PPI reclaim guide.
Why tax is taken off PPI payouts
The money you get paid back for PPI can have up to three main elements...
- A refund of the PPI you paid.
- If the bank (outrageously) added an extra loan to your original loan just to pay for the PPI, you get back any interest you were charged on this extra loan.
- You get statutory interest (at 8% a year, but not compounded) on the total of both those sums, for each year since you got the PPI.
Of these, only the third element is liable to be taxed. This is usually shown on your payout statement. (In the rare event it wasn't shown, if you were paid statutory interest, you can request a certificate from the firm that paid you back your PPI showing the tax deducted.)
The reason tax is due is because this statutory interest is paid to try to return you to the position you would have been in if you hadn't been mis-sold PPI. Therefore – oversimplifying somewhat – it counts as savings interest as if you'd earned it on your saved cash.
This applies even if the PPI payout was used to pay off existing debts with the lender, or went towards a claims firm's costs, as you are still benefiting in the same way.
Why you may be owed tax back on PPI payout's interest
If tax is due on PPI payouts, most firms always have, and still do, deduct it automatically, at the basic 20% rate before you get the money. This has always been an obvious issue for non-taxpayers.
However, since 6 April 2016, far more people have been owed tax back as that's when the personal savings allowance launched. It allows most taxpayers to earn up to £1,000 a year of savings interest tax-free.
Since then, while most savings interest has been paid 'gross', ie, without any tax being taken off, PPI still has 20% automatically deducted.
And as PPI is taxed as a lump sum payment at the point it is paid, most people who have paid tax on PPI payouts since then are entitled to some money back.
Tax is deducted at the basic 20% rate, so for every £100 of statutory interest you earn, you pay £20 in tax. To give you an idea of how it relates to the size of PPI payouts, I've jotted down a ready reckoner – but there are many factors, so this is rougher than Gino D'Acampo's stubble.
|Total PPI reclaim||Tax taken off at source|
|PPI taken out 3 yrs before||PPI taken out 5 yrs before||PPI taken out 10 yrs before|
The tax you can reclaim on payouts after 6 April 2016
The PPI payout is taxed in the year it is paid, so even if you took out a PPI policy in, say, 2004, if it was repaid in 2016, it's that later tax regime that counts.
If you were a non-taxpayer in the year the PPI was paid out (eg, currently that means those earning less than the £12,500 personal allowance), unless the statutory interest pushes you over the taxpaying threshold, you can claim all the tax back.
For most taxpayers, as well as the normal income-tax personal allowance, since 6 April 2016, the personal savings allowance is a further specific amount you are allowed to earn tax-free just on savings interest:
- Basic 20% rate taxpayers (earning c. £12,500-£50,000) can earn £1,000 in interest a year tax-free.
- Higher 40% rate taxpayers (earning c. £50,000-£150,000) can earn £500 in interest a year tax-free.
- Top 45% rate taxpayers (earning over £150,000) don't get a personal savings allowance.
If the total interest earned from savings and PPI statutory interest is less than your personal savings allowance, you are due all PPI tax paid back.
If the combined amount pushed you over the threshold, you should only pay tax on the amount above it. Take this example:
Betty Basicrate is a 20% taxpayer. In 2017, she…
A) Earned £200 interest on her savings.
B) Got a PPI payout, which included £850 of statutory interest.
So her total interest for the year was £1,050 – £50 over her personal savings allowance.
Therefore, she should only pay 20% tax on the £50 over her personal savings allowance (so £10 tax) and the rest is tax-free. As the PPI automatically had £170 tax taken off it, she is due £160 back.
If you were a higher-rate taxpayer in the year you got your PPI payout, you should've been paying 40%. You may have done this through self-assessment; if not, let HMRC know.
The tax you can reclaim on payouts before 6 April 2016
You can only claim back four tax years, as well as the current one. So as the new tax year has just started, that means the furthest you can go back is the 2015/16 tax year.
As basic-rate taxpayers should've been paying 20% tax, and that's what was automatically deducted, there's nothing to claim back. Yet non-taxpayers, or those earning just enough to pay tax but not much more, so were on the starting savings rate, should be able to reclaim some or all of the tax on this just like other savings income.
If you were a higher-rate taxpayer, then you should've been paying 40%. You may have done this through self-assessment, but if not, let HMRC know.
How to claim the tax back
If you believe you're owed tax back and haven't reclaimed it, the simple answer is to use the 'Claim a refund of income tax deducted from savings and investment' form R40 (or form R43 if living overseas), preferably filling in the online version.
Yet HMRC makes these forms pretty complicated, as it includes a whole host of other things too. So it may be a struggle for those who normally just pay tax via PAYE (ie, the payroll).
Here are a few tips to help. I'm assuming you are on PAYE, and have simple tax affairs…
- Don't miss the fact that at the top of the postal form, above the boxes, you must put your name and address and the tax year you got the PPI payout in.
- Where it says enter your agent's details, that just means your accountant if you have one. If not, leave it blank.
- There are official notes to help you fill in the R40, though sadly they're mostly written in officialese, and cover a huge range of eventualities.
- Box 1 is where you enter your personal details. Ensure these are correct, especially your national insurance number. Then check it again. Get this wrong and it is all a bit pointless.
- Box 2 is where you put the info about your income. This tells HMRC whether you were a non-taxpayer, basic rate or higher rate. Find that info 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 put the various details of the interest earned (ie, the statutory interest on PPI and interest on other savings).
- Box 3.1 is where you detail the tax taken off the statutory interest part of the PPI payout (and any other tax taken off at source, though this last measure is likely to be rare).
- Check through boxes 4 to 10. Most people won't have anything to fill in here – but check just in case, and fill them in if you do.
- Fill in the repayment instructions in box 11 and sign box 12.
- If you had more than one PPI payout and it was in a different tax year, you'll need to do a separate form for each.
I wish the form were simpler, but I hope this gives you a little help to get through it. If you're really, really struggling to fill the form in, you could just include a covering letter to HMRC, including your address and national insurance number saying something like:
"I was a basic-rate taxpayer in the 2016/17 tax year, and had £xx tax automatically taken off me at source for a PPI reclaim payout. That should have been part of my tax-free personal savings allowance, please can I reclaim it? I have tried to fill in the form as best I can."
Or call HMRC on 0300 200 3300 to discuss. I can't promise writing the letter will help, but it's better than doing nothing.
Higher or additional-rate taxpayers
Higher or additional-rate taxpayers will need to declare the extra income (just the statutory interest, not the other parts of the refund) to HMRC to ensure they pay the correct tax.
Contact your tax office or call the income tax helpline on 0300 200 3300 if you need more info.
Please use the comments section below or the forum to let me know how you get on: if you get money back, how easy it was and how much you got back.
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