PPI Tax Refund
If you have received a PPI pay-out since April 2016, tax may have been deducted.
Since April 2016 non-taxpayers and basic rate taxpayers can probably get some or all of this back from the HMRC!
This blog looks at who can claim this tax back and how to do it.
Why was this taxed?
People often feel cross that they are charged tax on a refund. If you return something to a shop for a refund, you wouldn’t expect that to be taxed, it’s your own money you are getting back.
The taxman agrees – the refund part isn’t taxable.
But if 8% extra interest has been added to your refund, this is treated like interest you get on savings and so it’s taxable.
Most lenders deduct tax at the basic rate of 20% from the 8% interest and send this tax to the HMRC.
On your Final Response Letter from your bank or lender, there will be a line that says “interest gross” this is what they worked out the 8% interest to be and a line that says “interest net” has had 20% of tax taken off.
Example: Peter received a PPI pay-out in Nov 2018, he is a 20% taxpayer
Refund of Interest and Fees: £1,616.05
8% interest net: £415.03
Total settlement: £2,031.08
Tax details: 8% interest gross: £518.79
basic rate tax deduction: £103.76
Here the amount Peter was sent was £2,031.08. This was the refund plus the 8% interest (gross) less the basic rate tax deducted.
New rules about savings interest from 2016
From April 2016 a basic rate taxpayer is allowed to earn £1,000 in savings interest in a tax year without paying tax on it. So this will save you up to £200 in tax – 20% of £1,000.
This amount is £500 for a higher rate taxpayer – which gives the same refund as 40% of £500 is also £200.
This applies to the 8% interest you have got as part of your refund. This interest is still taxable – that’s why HMRC haven’t changed their page saying that it is taxable.
But the new tax-free band means that many people getting one of these refunds shouldn’t have to pay tax and can claim it back if the lender has deducted tax.
How much can you get back?
This depends on whether you pay income tax and at what rate.
Remember if you are close to the top end of a tax band, the 8% being added may put you over into the next rate tax band.
Luckily you don’t have to do the calculations, just tell the agent or taxman the numbers and they will work out your refund.
If you have a low income or don’t pay income tax at all
If you have an income of less than £18,500 including the 8% on your refund, then all your refund should be tax-free. You should get a refund of all tax deducted.
(Why £18,500? It’s the 2019/20 personal allowance of £12,500 plus the “starting rate of tax on savings ” of £5,000 plus the £1,000 a basic rate taxpayer is allowed to receive from savings tax-free.
If you are a basic rate taxpayer
If your income is over £18,500 and you pay basic rate tax, you can get back up to £200 of tax that was deducted.
BUT if you received any refunds including 8% interest with no tax deducted and the total amount of any interest you were paid came to over £200 you will have to pay tax on this – see below for some calculations.
If you are a higher rate taxpayer
The first £200 of any interest should be tax-free.
This is more complicated because the bank or lender has deducted tax at 20% but you should really have paid 40%.
As a result:
- if you had less than £100 deducted, you can claim it all back (as if you double this you will still be under the £200 you can get tax free)
- if you had between £100 and £200 deducted, you can claim back some of this;
- if you had over £200 deducted you owe the taxman more. The extra is the same amount as the tax that has already been deducted LESS £200 which is your tax-free amount.
Complete an R40 form to claim tax deducted
Unless you normally complete a self-assessment tax form, use the R40 form to get some or all of this tax back.
You have to use a separate form for each tax year.
The current tax year runs from 6th April 2020 to 5th April 2021. Once the tax year has finished, you can claim for all refunds you were given in the last year and you also know how much other income you had during that year (from your P60 or P45) so it’s simple to fill in the form.
If you just had one refund and no other savings interest, you enter the details of your normal income from a job or benefits or a pension in boxes 2.1 to 2.9.
Then you put the details of your refund in boxes 3.1, 3.2, and 3.3.
- DO include any refunds where 8% interest was added but the lender didn’t take any tax off;
- DO include any interest you received from taxable bank accounts;
- DON’T include the interest refunds or associated interest part of the refunds – these are not taxable;
- DON’T include any interest from tax-free savings accounts, e.g. ISAs or N&SI accounts which aren’t taxable.
You should get a refund within about 6-8 weeks! For the example shown above, this should be the £103.76 tax that was deducted.
Do not use R40 if you submit a self-assessment form
The R40 form is for use by people who do not submit a self-assessment form.
If you are self-employed or have to submit a self-assessment for some other reason, don’t use the R40 form, just enter the details of the 8% interest and tax deducted on your self-assessment form as “other savings income where tax has been deducted at source”. The refund you get will be the same.
You can also amend the previous year’s self-assessment forms if you have just found you can get the tax back from a PPI refund in 2017.
Like all tax refunds/rebates from HMRC, you can complete the paperwork and submit the application yourself. HMRC does not make the process easy or simple, but it’s well worth applying as this is money that is owed to you.
The other option is to use an accountant or an agent like “Claim My Tax Back”.
Date posted: 28/06/2020