Are you due a tax refund on PPI claims? – we always like to hear that HMRC might owe us money.
Payment Protection Insurance, also known as PPI, has been a scandal discussed many times since the early 2010’s, but for those of you who are unaware of what this scandal is, the long and short of it is that many banks, building societies, credit card companies and loan providers mis-sold this policy to many of their customers in a bid to seemingly increase their profits.
By the run up to August 2019 when there was a deadline imposed, millions of people had put forward their PPI claim to the banks and lenders, where the complaint was investigated and upheld, they would have received a refund of at least some of the premiums they paid including an interest payment which depended on how long you had been out of pocket.
If this was you, then when this refund was issued, the lender may have automatically deducted income tax from the interest proportion of your payout, despite the fact that in some situations you may not have needed to pay all of this tax. Where this is the case, you’re entitled to a refund of any tax you unnecessarily paid, a refund known in the industry as a PPI tax refund.
I worked for a company for almost seven years helping people like you reclaim any monies you may be due back (don’t worry, I wasn’t one of those pestering you, we only worked with customers that wanted our help). I’ve learnt a lot over the years and today I’m hoping to share a little of that knowledge with you to hopefully help you even more.
What Did I Pay Income Tax On?
When you received a refund, your total refund will have been broken down as follows:
- The value of any premiums that you paid towards your policy
- The contractual interest accrued due to the payments
- Compensatory interest, the Statutory interest at 8% of the total amount paid out to compensate for any potential earning lost when this refund was issued to you, the income tax would have been deducted from the compensatory statutory interest element of your offer. This would have been at the basic rate of 20%.
Why Might I Be Due a PPI Tax Refund?
Not everyone is expected to pay income tax, and for those that are, as of the 6th April 2016 you were entitled to a Personal Savings Allowance on any savings income that you receive.
The statutory interest applied to your offer was to account for any potential interest you would have received should you have saved the monies that you paid towards your premiums. This means that the statutory interest is classed as savings income, and therefore you’re entitled to your Personal Savings Allowance.
What actually happened was that the lenders took the stance that you had already used your allowance and therefore they would collect the full amount of tax on HMRC’s behalf and change the situation from the emphasis being placed on the claimant to report the gain to HMRC and calculate for their allowance to the claimant having to request a refund from HMRC if they felt they were due one.
How Much Personal Savings Allowance Am I Entitled To?
This is going to depend on the income tax band that you belonged to at the time of the refund. Below is a table to help you work out which band you belong to and the allowance you’re entitled to.
|Income Tax Band||Basic Rate||Higher Rate||Top Rate|
|Earnings||£12,571 - £50,270||£50,271 - £150,000||£150,000 +|
|Income Tax Rate||20%||40%||45%|
The allowance gives taxpayers a threshold of savings interest that they’re allowed to earn, tax free.
Am I Entitled To a Refund Of The Tax I paid
Unfortunately, you can only go back four tax years (excluding the current tax year) when reclaiming any tax that you’re entitled to, which of course includes claims for a PPI tax refund.
This tax year is 2022/23. If we exclude this and then go back a further four tax years (as of writing), that brings us to 2018/19. Therefore, you could reclaim monies you’re owed if you received your PPI refund in or after the 2018 tax year, which started on the 6th April 2018.
If you received your refund before this date, then I’m afraid you will not be able to reclaim the tax that you paid.
Need help working out which tax band you belonged to in the tax year that you received your refund? Check out our FAQs below.
If, at the time you received your refund your earnings were less than £12,751, including your PPI refund, then you would have been classed as a non-taxpayer. Non-taxpayers do not need to pay any income tax on their earnings so you would be entitled to a full refund of any tax that you paid.
Whilst taxpayers may not be entitled to a full refund, you may be entitled to a refund in line with your Personal Savings Allowance.
If the total amount of interest that you earned on your savings, including your statutory interest from your PPI refund, equated to less than your Personal Savings Allowance, then you would be entitled to a full refund.
If the total amount was more than your allowance, then you should have only paid tax on the amount above your allowance. For example, if you’re Personal Savings Allowance is £1000, and the total amount of interest that you earnt in that year was £1100 then you would only need to pay tax on the £100 that took you over your allowance.
With the tax being taken off your statutory interest by the lender before the refund was given to you, your allowance was not taken into consideration, meaning you may have paid interest on monies that fell within your Personal Savings Allowance. Should this be the case, this would mean that you’re entitled to a refund of the tax that you over paid.
How do i reclaim my tax?
If you think that you’re entitled to a refund of your PPI tax, you have two options. You can contact a company to do it for you, or you can apply for the refund yourself by complete and submitting to HMRC an R40 form, or an R43 form if you’re living overseas.
If you wish for a company to do it for you, it could work out more convenient and may be worth doing if you think you will never get around to doing it yourself, don’t want to try and work out how to complete the forms and submit to HMRC or don’t want or have an accountant that can do it on your behalf. However, there will be a fee, so you won’t receive the full refund. Doing it yourself will take more time, but is possible and in the end, you will receive the refund in its entirety.
To apply for the refund yourself, there is an online version and a postal version of the R40 and R43 form, there is also a helpful guide for anyone struggling to complete the form.
Whilst these forms can be quite complicated, HMRC do have a helpline that if you’re having any problems, you can always try giving them a call on 0300 200 3300.
Some people were aware of the policy but were not made aware it did not cover them. Some did not know they had it. Others thought they had to have it, and some even tried to use it only to find out it wouldn’t payout.
A PPI claim is a complaint put forward to the lender regarding a mis-sale of the policy. The lender would then investigate the circumstances around the sale and where they agree, they would uphold the case and issue a refund.
The deadline for putting forward these complaints was the 29th August 2019. However, any complaints issued prior to this date should still be investigated and dealt with.
In 2014, Mrs Susan Plevin raised a complaint against Paragon Finance, a complaint which was later upheld by the Supreme Court. Mrs Plevin took out a personal loan with Paragon finance, along with a PPI policy. What she didn’t know was that 71.8% of her PPI premiums were made up of commission.
Lord Sumption upheld Mrs Plevin’s complaint on the grounds that an unfair relationship between the borrower and the lender had been created. He deemed that there is a tipping point in which ‘commissions may become so large that the relationship cannot be regarded as fair if the customer is kept in ignorance’.
Lord Sumption does not define the tipping point but does rule that 71.8% is a ‘long way beyond it’. The average commission on PPI policies is an astonishing 67%. This has led to an influx of complaints against the undisclosed commissions, with many of these complaints being upheld.
Alternatively, you can pull up your bank statements for the relevant tax year. For example, if you received your refund in October 2020, then check your bank statements from 6th April 2020 to 5th April 2022.
Once you have them, calculate all your taxable income, this includes, but is not limited to your salary and your PPI refund. Once you’ve established the value you can then work out your tax bracket from this figure.