Can you claim back tax on your mis-sold PPI?

If you're one of the millions of people who've shared in the £34,000,000,000 of PPI repaid (so far), then according to our Money Saving Expert Martin Lewis you may have paid tax on it that you didn't need to.

If so, and your payout happened in the last four years, he says you are due this money back, and he’s here to explain how…

Before we start, what is mis-sold PPI and how do you reclaim it?

Payment Protection Insurance (PPI) was a policy designed to cover your repayments on a credit card, overdraft, loan or mortgage if you lost your job or were sick. The policy 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 lies to add it to loans, credit cards, mortgages and other forms of debt.

You can reclaim it for free, as Ms Nosh did “@MartinSLewisThanks to you I got my mum PPI over £8,000 back starting date back from 2004!! Thank You Martin for showing the way!! :)” and John who tweeted “@MartinSLewis Thanks for your advice. Got £13,000 from MBNA and £6,300 from Halifax for PPI claims! ”. For more detail on this and how to reclaim for free, do see the PPI reclaiming explainer I did last month.

There is a deadline to claim isn't there?

Yes, for those who haven't reclaimed PPI yet, you need to get a move on. The deadline on starting a claim is 29 August. After then you won’t be able to, though technically you could go to court but it is much more difficult.

So, if you've had a credit card, loan, mortgage, overdraft or car finance in the last 20 years, check if it had PPI, and if you did and it was mis-sold put a claim in ASAP.

Yet today, you’re saying those who have had payouts may also able to reclaim tax – why?

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 8% a year, but not compounded) on the total of both those sums, for each year since you got the PPI.

However, of these only the third element is taxed at the basic 20% rate - so £20 tax deducted for every £100 of statutory interest. That’s because this statutory 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. This applies even if the PPI payout 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.

So why are some owed this tax back?

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 payouts counts within your personal savings allowance.

Yet unlike savings which are now paid without any tax taken off, PPI payouts 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, then you can claim it back.

(It’s worth noting you can actually claim back tax as far as the 2015/16 year, the year before the PSA launched, but then it only really applies to people who were non taxpayers at the time.)

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 above it. Take this example:

Betty Basicrate is a 20% 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 quid over her personal savings allowance. Therefore, she should only pay 20% tax on the £50 over her personal savings allowance (so £10 tax) and the rest is tax-free. As the PPI automatically had £170 tax taken off it, she is due £160 tax back.

How do people reclaim this?

For full details on how the tax on PPI payments work, and help with the form to reclaim it, read Martin’s ‘Reclaim tax on PPI payments’ blog, but briefly…

To reclaim the tax you’ll need to fill in the online (or you can post it if you need)R40 form (or form R43 if living overseas). It’s a bit complicated but if you read my blog linked above, it should help walk you through it. Higher or additional-rate taxpayers will need to declare the extra income (just the statutory interest, not the other parts of the refund) to HMRC to ensure they pay the correct tax.