You thought PPI was all over. It is now. On 29 August the guillotine on PPI reclaiming fell – cutting off your ability to claim for mis-sold PPI.
It’s likely in total over £40bn will be paid out. Yet many people have wrongly had tax taken off their payouts, and can now claim it back.
So if you’re one of the millions who received a payout in the last four years or are a last minute Lilly or Larry who snuck in a claim before the deadline (over 500,000 did, in just the last two days, via my website alone), this is a must read.
Tax is taken off before you get your PPI money
The money you get paid back for mis-sold 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 eight per cent a year, but not compounded) on the total of both those sums, for each year since you got the PPI.
It’s the third element, the statutory interest, which is taxable. This is money paid out to try and return you to the position you would have been in if you hadn’t been mis-sold PPI.
And – oversimplifying somewhat – it counts as savings interest, as if you’d earned it on saved cash.
Yet unlike savings interest which is paid without any tax taken off, the statutory interest is automatically taxed at the basic 20 per cent rate - so £20 tax deducted for every £100 of it
This applies even if the PPI pay out was used to pay off existing debts with the lender, or went towards claims firms’ costs, as you are still benefiting in the same way.
Most people shouldn’t pay tax on savings
On 6 April 2016 the personal savings allowance (PSA) launched, allowing basic 20 per cent rate taxpayers to earn up to £1,000/year of savings interest tax-free – higher 40 per cent rate taxpayers earn £500 and top 45 per cent rate taxpayers don’t get anything. The statutory interest from PPI payouts counts within this personal savings allowance.
So if you had PPI tax taken off, and were either a non-taxpayer or didn’t use your full personal savings allowance in the tax year you got your PPI payout (it’s the date of the payout that triggers the tax), you can claim the tax back.
If the total interest earned from savings and PPI statutory interest is less than your personal savings allowance, you’re due all PPI tax paid back. Yet if the combined amount pushed you over the threshold, you should only pay tax on the amount above it. For example…
Betty Basicrate is a 20 per cent 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 PSA. She needs to pay 20 per cent tax on this £50, and the rest is tax-free – so £10 tax. As the PPI automatically had £170 tax taken off it, she is due £160 tax back.
How much you’re due back depends on the size of your PPI payout and when you took out the loan.
But as a very rough example, if you received a £1,000 PPI payout on a loan taken out five years ago, you could receive £60 tax back, or £100 back if you took it out 10 years ago - but the amounts can be much larger, especially for non-taxpayers.
To reclaim the tax, fill in an online form
It’s called the R40 form (or form R43 if living overseas), which you can find online at www.gov.co.uk – you can post it back too if you need. It’s a bit tricky to follow so I’ve put detailed help to fill it in, in my blog at www.mse.me/ppitaxback
If you’re struggling to fill the form in, call HMRC on 0300 200 3300 to discuss. Higher or additional-rate taxpayers will need to declare the statutory interest to HMRC to ensure they pay the correct tax.
Martin Lewis is the founder and chairman of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip