Can you reclaim the tax on a PPI payout?
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