Short answer: not on the refund amount, but you do on the 8% interest. But only in certain circumstances.
If you receive a PPI refund in the form of a cash payout then you should receive 8% interest on top for every year that you held the PPI policy. This interest represents the money you would’ve earned had your cash been in a savings account and is usually given to claimants untaxed by the lender.
You need to pay tax on the interest according to your tax band, basic rate taxpayers owe 20% with higher tax bands owing 40% or 50%. Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, said: “People need to pay tax on any interest they received. Many people may not realise that.”
The good news is; because the interest is a one-off payment, you can pay the amount due without having to enter the self-assessment system. Simply call the tax office and make a payment or tell HMRC to claw the money back through an adjustment in your tax code, so you pay it over the whole year.
Before you make any payments be sure to check if the tax has already been paid as the interest may or may not have had tax already deducted depending on the type of company making the payment. The HMRC state that “If banks and building societies are paying the interest then there is no obligation on them to deduct tax because the interest is not interest on a deposit and there are specific exemptions for banks and building societies from the need to deduct tax from yearly interest.”
They add: “All other companies have an obligation to deduct tax from yearly interest when it is paid. If a company does deduct tax then there is a statutory requirement that it advises the customer when making the payment that tax has been deducted and the gross and net amounts of interest.”
If you receive a refund letter from a bank or building society they should tell you that you need to pay tax on the interest.
How much you owe will also depend on your individual circumstances, here’s some guidance from HMRC:
– If you are a non-taxpayer and have had tax deducted from the interest, then you may be able to make a claim to have the tax repaid to you by HMRC. To find out more information on claiming Income Tax back follow the link ‘Tax refunds and reclaiming tax’ in the ‘More useful links’ section below.
– If you are a basic rate taxpayer and tax has been deducted from the interest then you need do nothing further unless you need to complete a tax return. If you need to complete a tax return you should enter the amounts in the appropriate section.
– If you are a higher rate taxpayer who has received interest with or without tax deducted, or a basic rate taxpayer who has received interest without deduction of tax, then the interest should be reported to HMRC. You should include the amount on your tax return or by contacting HMRC to report this new source of income. Follow the link below to report changes to your income to HMRC.
For more information from HMRC about tax on PPI compensation interest, click here.
This is part 15/15…
PPI Claims 101 – 1/15 | What is PPI?
PPI Claims 101 – 2/15 | Should I Bother Making a PPI Claim?
PPI Claims 101 – 3/15 | How To Claim Back PPI Yourself
PPI Claims 101 – 4/15 | How To Find The Best PPI Claims Company
PPI Claims 101 – 5/15 | No Win No Fee PPI Claims Explained
PPI Claims 101 – 6/15 | What is a PPI Template Letter?
PPI Claims 101 – 7/15 | Credit Card PPI Claims
PPI Claims 101 – 8/15 | Mortgage PPI – The Hidden Windfall
PPI Claims 101 – 9/15 | PPI Claims Deadline – Forget One, Remember The Rest
PPI Claims 101 – 10/15 | The Information You’ll Need To Make a PPI Complaint
PPI Claims 101 – 11/15 | What To Do If Your PPI Claim Is Rejected
PPI Claims 101 – 12/15 | The Financial Ombudsman & PPI Claims
PPI Claims 101 – 13/15 | Payment Protection Insurance Consumer Questionnaire
PPI Claims 101 – 14/15 | How Long Does a PPI Claim Take?
PPI Claims 101 – 15/15 | Do I Need To Pay Tax On My PPI Refund?
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By John Gregory
John writes for a PPIClaimsAdviceline.com as well as a number of financial blogs, he also create content for infographics, FAQ’s and personal finance sites. You can find him on Google+ and Twitter, get in touch – he doesn’t bite. Unless you’ve been mis-selling financial products.
At this time we are continuing business as usual however our team will now largely be working from home. This limits our phone contact availability. Customer support remains available Monday to Friday but please email in to firstname.lastname@example.org with your query. We aim to get back to you within 48 hours. On receipt of PPI refunds our fees remain payable and can be paid via our website www.oraclelegal.co.uk/payments/ or via BACS. We are also working on some other areas of potential claim for you in connection with your PPI and will be in touch shortly where applicable to present this to you.