PPI refund? Claim back the tax deducted!

If you have received a PPI or payday loan refund or any other type of affordability refund, tax may have been deducted. Since April 2016 non-taxpayers and basic rate taxpayers can claim this back from the HMRC! This article looks to answer any questions you may have about your eligibility in claiming back what is owed to you.

Why was this taxed?

People are often unhappy that they are charged tax on a refund. If you were to return something to a shop for a refund, you would not expect that to be taxed as it is a simple refund for a purchase that you made. HMRC agrees and the ‘refund’ part is not taxable.

But if 8% extra interest has been added to your refund, this is treated like interest you get on savings and so it is taxable as HMRC have explained:

Most lenders deduct tax at the basic rate of 20% from the 8% interest and send this tax to the HMRC.  When they give you details, a line that says “interest gross” is what they worked out the 8% interest to be and a line that says “interest net” has had the 20% of tax taken off.  This is an example:

Refund of Interest and Fees: £1,513.06

8% interest net: £385.02

Total settlement: £1,898.08

Tax details: 8% interest gross: £481.27

Basic rate tax deduction: £96.25

Here the amount he was sent was £1,898.08. This was the refund plus the 8% interest (gross) less the basic rate tax deducted.

From April 2016 a ‘basic rate’ taxpayer can earn £1,000 in savings interest in a tax year without paying tax on it. So, this will save you up to £200 in tax – 20% of £1,000. This figure increases to  £500 for a higher rate taxpayer – which gives the same refund as 40% of £500 is also £200.

This applies to the 8% interest you have got as part of your refund. This interest is still taxable, HMRC has made no changes to their website which breaks this down. But the new tax-free band means that a large number of people getting one of these refunds should not have to pay tax and can claim it back if the lender has deducted tax.

How much can you get back?

This is very much dependent on whether you pay income tax and at what rate. The following are simple cases. It is important to keep in mind that if you are close to the top end of a tax band, the 8% being added may move you into the next band. If you are unsure about the calculations allow tax professionals to work out just how much you are owed.

If you have a low income or don’t pay income tax at all

If you have a lower income of less than £18,500 including the 8% on your refund, then all your refund is tax-free. You should therefore receive a refund of all tax deducted.

Click here to get started with your claim

Published on: 04/05/21

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