Millions of people have been paid back thousands each already, yet whilst celebrating the money, it’s likely most missed the fact they may’ve paid tax unnecessarily. Even if you have already reclaimed, before I get into the tax issue, double check if you had PPI on any other products. And 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 they got a few grand back.
What is Payment Protection Insurance (PPI) mis-selling?
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…
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Lenders lying that it was compulsory (it wasn’t) or it’d get you a cheaper loan
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Having it added when people had said they didn’t want it
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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 it, the Plevin rule that came into force in 2017, means if the commission the bank or building society received from the insurer for flogging it was over 50 percent you’re usually due the amount above that back (the average commission was 67 percent.)
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.
And 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!”.
Are you due tax back on your PPI pay out?
The money you get paid back for mis-sold PPI can have up to three main elements.
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A refund of the PPI you paid
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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
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You get statutory interest (at eight percent a year, but not compounded) on the total of both those sums, for each year since you got the PPI
Only the third element is taxed. It’s automatically deducted at the basic 20 percent rate – i.e. £20 tax is taken for every £100 of statutory interest. This 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 so the same taxes apply.
To put in context someone with a £1,000 PPI pay out, 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.
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 20 percent rate taxpayers to earn up to £1,000 a year of savings interest tax-free, higher 40 percent rate taxpayers can earn £500 and top 45 percent rate taxpayers don’t get anything. The statutory interest from PPI pay outs counts within this PSA.
Yet unlike savings which since then have been paid without any tax taken off, PPI pay outs still automatically have 20 percent 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.
How to reclaim 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.
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 percent 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