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 – £12,570 in 2023/24. 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 R40 on GOV.UK, together with instructions about how to complete the form. For other options of getting hold of a form, see our page How do I claim tax back on savings income?
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 PPI information do I need?
In order to claim back tax on the interest element of your PPI payouts, you need to know: the net amount of interest you received, the tax deducted and the gross amount of the interest you received.
If you have lost the letters that accompanied the PPI payouts, then you will not know how much of the payout was made up by interest, as compared to the actual compensation itself. It is not really possible to work this out without the breakdown of the payment.
If the bank or other financial institution won’t help you informally, then you could try making a formal Subject Access Request (SAR) request to get the information that you need (as this is personal data that the bank holds about you).
If this doesn’t work, then as the banks should send HMRC information about the amount of tax that they have withheld from you, you could try writing to HMRC and explaining your circumstances. They may be able to help you by giving you the information that they have in their systems about the amount of tax deducted - from this, you should be able to work out how much the interest element of the PPI payout was as the tax should represent 20% of the total amount. So, if the tax was £400, we can work out that the interest must be £2,000 by saying £400 x 100/20.
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 2022/23, you have until 5 April 2027 to submit a claim. If the overpayment arose in 2019/20, you have until 5 April 2024 to put in your claim and so on.
Using an agent
Some people use PPI claims management companies to help get their PPI payouts. You should be aware that sometimes these PPI claims management companies work in partnership with tax refund companies and may pass your details over to them. They may then contact you about a PPI tax refund or other refunds.
In some instances we have heard of, it seems that agreeing to terms or conditions and/or providing an electronic signature to the PPI claims management company is taken as meaning that you consent to the tax refund company also working on your behalf.
Take extra care with what you are signing up for – particularly when entering your details online or providing a signature. Before signing up to any services, you should read our guidance on using a tax refund company.
Where can I find more information?
For more information on getting hold of and completing a form R40, see our page How do I claim tax back on savings income?
There is a guide on how to complete form R40 to claim a PPI refund, including an annotated version, in our resources section.