How to claim back tax owed on PPI payouts yourself - Gareth Shaw

Gareth says…

The deadline to reclaim compensation for mis-sold Payment Protection Insurance (PPI) passed in August last year, but we at Which? are still fielding queries about PPI. I’m not surprised – PPI is the biggest financial mis-selling scandal we’ve ever seen, and a quite unbelievable £38.3bn has been paid out, according to the Financial Conduct Authority (FCA).

Of course, whenever there is mis-selling, there are companies hovering around offering to help you make a claim for recompense. Claims management companies played a huge role in the PPI scandal (for better or worse), helping many people make a claim but charging huge fees – sometimes as much as 40 per cent of your payout – as a result.

Which? has long maintained that you didn’t need to use a claims company to get a PPI payout, as the process was relatively straightforward and you did not have to part with such a large chunk of your compensation.

Now that you can no longer make a claim, it looks like these firms are attempting to pick up the scraps of the saga by now offering to help reclaim tax.

It’s worth exploring why they are contacting you about this – after all, isn’t financial compensation paid tax-free?

Well, your PPI payout was probably made up of two parts – the actual amount you spent on the insurance and ‘statutory’ interest of 8 per cent a year for each of the years since you purchased PPI. There could sometimes be a third element, particularly if you took out a loan.

Some firms made you borrow more money to purchase the PPI, so if this happened to you, you’d be able to reclaim the interest you paid (and would earn statutory interest, too).

Of these elements, it is the statutory interest that is potentially taxable. Most payouts would come with 20 per cent - the basic-rate of income tax – deducted. But you can claim this back as four years ago, the personal savings allowance was introduced which stopped millions of savers paying tax on their savings interest. If you’re a basic-rate taxpayer, you can earn £1,000 in interest before you pay income tax. Higher-rate taxpayers (those who earn above £50,000) can earn £500 in savings interest before tax.

The tax is calculated on the year that you received the payout, not the year you took out the PPI, so if it was on 6 April 2016 or later, you can reclaim the tax you’ve paid.

You cannot reclaim tax from any earlier years, as you can only claim overpaid tax going back four years.

In answer to your question, it is incredibly simple to reclaim this. All you need to do is complete the R40 form on HMRC’s website and send it back and you can get the money back. You don’t need to use a claims management company, and you certainly should avoid anyone charging such an extortionate fee.

Claims firms have not been able to charge anything more than 24 per cent for claims relating to PPI, so this firm is breaching the rules.

One thing to note about your earnings and the amount of interest you get from your PPI payout. As the PPI interest is counted as income, it could push you into a higher tax bracket when added to your other income (salary or pensions, for example).

If you’re close to the higher-rate threshold, this could tip you over, reducing the amount that you can save through the personal savings allowance and potentially leaving you with 40 per cent tax to pay on the excess. Your tax code will usually be adjusted so that HMRC can reclaim this.

Gareth is head of money at which.co.uk.

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