Can you re­claim the tax on a PPI pay­out?

Gloucestershire Echo - - CASHING IN - MARTIN LEWIS You can Tweet me @Martinslew­is

THE DEAD­LINE to start a PPI re­claim is Au­gust 29 when the guil­lo­tine falls on the nearly £40bil­lion mis-sell­ing scan­dal. Mil­lions of peo­ple have been re­paid thou­sands, yet whilst cel­e­brat­ing the money, it’s likely most missed the fact they may have paid tax un­nec­es­sar­ily.

Even if you have al­ready re­claimed, be­fore I get into the tax is­sue, dou­ble check if you had PPI on any other prod­ucts. And of course if you’ve never re­claimed, get your skates on and check if you’re owed.

ARE YOU DUE TAX BACK ON YOUR PPI PAY OUT?

THE money you get paid back for mis-sold PPI can have up to three main el­e­ments.

1. A re­fund of the PPI you paid.

2. 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.

3. 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.

Only the third el­e­ment is taxed. It’s au­to­mat­i­cally de­ducted at the ba­sic 20% rate. This in­ter­est is paid to try and re­turn you to the po­si­tion you would have been 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, so the same taxes ap­ply.

To put in con­text some­one with a £1,000 PPI pay out, on a PPI pol­icy taken five years be­fore would have paid £60, some­one with a £7,500 pay out taken out 10 years ago would have paid £730.

WHY ARE SOME OWED THIS TAX BACK?

PPI re­claims are taxed in the year they are paid back, not the year you took the pol­icy.

On 6 April, 2016 the per­sonal sav­ings al­lowance (PSA) launched. It al­lows ba­sic 20% rate tax­pay­ers to earn up to £1,000 a year of sav­ings in­ter­est tax-free, higher 40% rate tax­pay­ers can earn £500 and top 45% rate tax­pay­ers don’t get any­thing.

The statu­tory in­ter­est from PPI pay outs counts within this PSA.

Yet, un­like sav­ings which since then have been paid with­out any tax taken off, PPI pay outs still au­to­mat­i­cally have 20% tax de­ducted be­fore you get it. So if, like most peo­ple, you haven’t earned over your PSA in the year your PPI claim was re­paid, you can claim it back.

HOW TO RE­CLAIM PPI PAY­OUT TAX

THERE’S a form on­line at HMRC to re­claim it – it’s called the R40 form (or R43 if you’re liv­ing over­seas). As it’s a gen­eral form to re­claim ex­tra tax paid on sav­ings and in­vest­ments, sadly it’s quite com­pli­cated to fill in. I’ve writ­ten guid­ance notes to help at mse.me/ppi­tax.

If you’re a higher or ad­di­tional-rate tax­payer and didn’t de­clare the ex­tra statu­tory in­ter­est to the rev­enue in the year it was paid, you should let them know, as you only paid 20% tax and it might need to be more.

■ Martin Lewis is the founder and chair of Moneysav­ing Ex­pert.com. Get his free Money Tips weekly email, at mon­eysaving­ex­pert.com/ lat­est­tip

Still time to check for PPI

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