How do I claim back tax on a payment protection insurance (PPI) pay-out?
Tax may have been deducted at source from the interest element of a PPI pay-out. If the tax deduction means that you overpaid tax in the tax year in which you received the PPI pay-out, you can claim a repayment as set out below.
Why have I paid tax on my PPI pay-out?
PPI pay-outs are made up of the compensation (which is the refund of the PPI premiums paid and the interest you have paid on those premiums) and the statutory interest on the compensation, at 8% (paid in recognition that you were deprived of your money for some time).
It is only the second element, the statutory interest, which is taxable (in the tax year that you receive it). Your circumstances in the tax year(s) in which you paid the original premiums are not relevant.
Although the statutory interest element is treated for tax purposes as savings income, it is not paid gross like bank interest. Most of the time, basic rate tax is deducted at source on the interest element of a PPI pay-out before it is paid to you. The tax is then passed to HMRC on your behalf.
But you may not ultimately be liable to pay tax on the PPI interest element, for example, if when combined with your other savings income for the year, the total is within your Personal Savings Allowance, or if your total taxable income for the year is within your tax-free personal allowance – £12,500 in 2019/20. If this is the case, it is possible to claim back the tax which has been deducted at source.
How do I claim back the tax on my PPI pay-out?
You can make a claim for a tax repayment on your PPI interest using form R40 (or form R43 if you are living overseas). You can either do this online, or by downloading and printing off a paper form to send by post. You can access the form on GOV.UK, together with instructions about how to complete the form.
In completing the form R40, you should input the net interest in box 3.1 ‘Net interest paid by banks, buildings societies etc, purchased life annuities and PPI payments – after tax taken off’. You should then input the tax deducted in box 3.2 and the gross amount in box 3.3.
You may have had other fees deducted from the pay-out, so you should ensure that the amount you are attempting to reclaim is just the tax element.
You also need to include on the form any other taxable income that you received in the tax year – including the state pension.
What are the time limits for making a claim for the tax to be repaid?
You normally have four years from the end of the tax year in which the overpayment arose to claim a refund. So, if you received your PPI refund in 2019/20, you have until 5 April 2024 to submit a claim. If the overpayment arose in 2015/16, you have until 5 April 2020 to put in your claim and so on.
Where can I find more information?
You can find more information about PPI pay-outs, including on how they may affect your tax credits/universal credit award in our news article.
For more information on completing form R40, see our page How do I claim tax back on savings income?.