PPI checked? Now get the tax back too

If youre a taxpayer and the total interest earned from savings and PPI statutory interest is less than your personal savings allowance, you are due all PPI tax paid back. Picture: PA

The deadline to start a PPI reclaim is fast approaching. On 29 August the guillotine will fall on the nearly £40,000,000,000 mis-selling scandal. Millions of people have been paid back thousands each already, yet whilst celebrating the money, it’s likely most missed the fact that 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 products. Of course if you’ve never reclaimed, get your skates on and check if you’re owed. I’m regularly swamped by messages from people who never thought they were due and are shocked that they got a few grand back.

Payment Protection Insurance (PPI) was a policy designed to cover a year’s repayments on a credit card, overdraft, loan, car finance or mortgage if you lost your job or were sick.

PPI in itself wasn’t a bad concept, but it was massively over-expensive and systemically mis-sold by banks and building societies, who for decades used hard sells or even scripted lies to add it to loans, credit cards, mortgages and other forms of debt (and yet no one has been prosecuted!) Common mis-selling types include…

– Lenders lying that it was compulsory (it wasn’t) or it’d get you a cheaper loan

– Having it added when people had said they didn’t want it

– Given it when it was inappropriate such as ‘unemployment cover’ for those who were self-employed, or not being asked about pre-existing conditions that could invalidate it.

Even if you weren’t mis-sold, the Plevin rule that came into force in 2017 means that if the commission the bank or building society received from the insurer for flogging it was over 50 per cent you’re usually due the amount above that back (the average commission was 67 per cent.) You don’t need to pay a firm to reclaim mis-sold PPI for you. Use my free guide and tool at www.mse.me/ppi and www.which.co.uk has good information too, plus there’s a free helpline from the regulator the FCA on 0800 101 8800, if you’re stuck.

As proof that it’s worth it, John tweeted “@MartinSLewis thanks for your advice. Got £13,000 from MBNA and £6,300 from Halifax for PPI claims!”.

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 per cent a year, but not compounded) on the total of both those sums, for each year since you got the PPI.

Of these only the third element is taxed. It’s automatically deducted at the basic 21 per cent rate – ie £21 tax is taken for every £100 of statutory interest. This statutory interest is paid to try and return you to the position you would have been in 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 payout, on a PPI policy taken five years before would have paid £60, someone with a £7,500 pay out taken out 10 years ago £730.

So 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 21 per cent rate taxpayers to earn up to £1,000 a year of savings interest tax-free, higher 41 per cent rate taxpayers can earn £500 and top 46 per cent rate taxpayers don’t get anything. The statutory interest from PPI payouts counts within this PSA.

Yet, unlike savings which since then have been paid without any tax taken off, PPI payouts still automatically have 20 per cent 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 (you can actually claim back tax as far as the 2015/16 year, before the PSA launched, but then it only really applies to non-taxpayers).

If you’re a taxpayer and the total interest earned from savings and PPI statutory interest is less than your personal savings allowance, you are due all PPI tax paid back. If the combined amount pushed you over the threshold, you should only pay tax on the amount of interest above it.

So how do you go about reclaiming 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 www.mse.me/PPItax.

Those who already filled in self-assessment tax forms, should’ve included the amount of statutory interest within that, in which case it was already taken into account.

If you’re a higher or additional-rate taxpayers 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 per cent tax and it might need to be more.

Martin Lewis is the founder and chair of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip

PPI checked? Now get the tax back too – Martin Lewis