If you have received a PPI or payday loan refund tax may have been deducted.
Since April 2016 non taxpayers and basic rate taxpayers can probably get some or all of this back from the HMRC!
This article looks at who can claim this tax back and how to do it.
Why was this taxed?
People often feel cross that they are charged tax on a refund. If you return something to a shop for a refund, you wouldn’t expect that to be taxed, it’s your own money you are getting back.
The tax man agrees – the refund part isn’t taxable.
But if 8% extra interest has been added to your refund, this is treated like interest you get on savings and so it’s taxable as HMRC explain here.
Most lenders deduct tax at the basic rate of 20% from the 8% interest and send this tax to the HMRC.
When they give you details, a line which says “interest gross” is what they worked out the 8% interest to be and a line which says “interest net” has had the 20% of tax taken off. This is an example:
Refund of Interest and Fees: £1,513.06
8% interest net: £385.02
Total settlement: £1,898.08
Tax details: 8% interest gross: £481.27
basic rate tax deduction: £96.25
Here the amount she was sent was £1,898.08. This was the refund plus the 8% interest (gross) less the basic rate tax deducted.
New rules about savings interest from 2016
From April 2016 a basic rate taxpayer is allowed to earn £1,000 in savings interest in a tax year without paying tax on it. So this will save you up to £200 in tax – 20% of £1,000.
This amount is £500 for a higher rate taxpayer – which gives the same refund as 40% of £500 is also £200.
This applies to the 8% interest you have got as part of your refund. This interest is still taxable – that’s why HMRC haven’t changed their page saying that it is taxable.
But the new tax-free band means that many people getting one of these refunds shouldn’t have to pay tax and can claim it back if the lender has deducted tax.
How much can you get back?
This depends on whether you pay income tax and at what rate.
The following are simple cases. Remember if you are close to the top end of a tax band, the 8% being added may puch you over into the next rate tax band.
Luckily you don’t have to do the calculations, just tell the taxman the numbers and he will work out your refund.
If you have a low income or don’t pay income tax at all
If you have an income of less than £18,500 including the 8% on your refund, then all your refund should be tax-free. You should get a refund of all tax deducted.
(Why £18,500? It’s the 2019/20 personal allowance of £12,500 plus the “starting rate of tax on savings ” of £5,000 plus the £1,000 a basic rate taxpayer is allowed to receive from savings tax-free… see Income tax rates and personal allowances for details.)
If you are a basic rate taxpayer
If your income is over £18,500 and you pay basic rate tax, you can get back up to £200 of tax that was deducted.
BUT if you received any refunds including 8% interest with no tax deducted and the total amount of any interest you were paid came to over £200 you will have to pay tax on this – see below for some calculations.
If you are a higher rate taxpayer
The first £200 of any interest should be tax-free.
This is more complicated because the firm has deducted tax at 20% but you should really have paid 40%.
As a result:
- if you had less than £100 deducted, you can claim it all back (as if you double this you will still be under the £200 you can get tax free)
- if you had between £100 and £200 deducted, you can claim back some of this;
- if you had over £200 deducted you owe the taxman more. The extra is the same amount as the tax that has already been deducted LESS £200 which is your tax-free amount.
Complete an R40 form to claim tax deducted
Unless you complete a self assessment tax form (see below), use the R40 form to get some or all of this tax back.
You can apply online or complete a paper R40 form and post it to HMRC – links to these are here.
The online questions are the same as the form, so I’ll just cover using the paper form here.
You have to use a separate form for each tax year.
The current tax year runs from April 2019 to March 2020. Once the tax year has finished, you can claim for all refunds you were given in the last year and you also know how much other income you had during that year (from your P60 or P45) so it’s simple to fill in the form.
If you just had one refund and no other savings interest, you enter the details of your normal income from a job or benefits or a pension in boxes 2.1 to 2.9.
Then you put the details of your refund in boxes 3.1, 3.2 and 3.3. The picture shows what this would look like for the refund example above.
If you had several refunds in this tax year with 8% interest included, add them up and put the totals in these boxes:
- DO include any refunds where 8% interest was added but the lender didn’t take any tax off;
- DO include any interest you received from taxable bank accounts;
- DON’T include the interest refunds or associated interest part of the refunds – these are not taxable;
- DON’T include any interest from tax-free savings accounts, eg ISAs or N&SI accounts which aren’t taxable.
You should get a refund within about 6 weeks! For the example being used, this should be the £96.25 tax that was deducted.
Don’t use R40 if you submit a self assessment form
The R40 form and its online equivalent is for use by people who don’t submit a self-assessment form.
If you are self-employed or have to submit a self assessment for some other reason, don’t use the R40 form, just enter the details of the 8% interest and tax deducted on your self-assessment form as “other savings income where tax has been deducted at source”. The refund you get will be the same.
You can also amend previous year’s self assessment forms if you have just found you can get the tax back fro a PPI refund in 2017 say. See “If you need to change your return”.
FAQs on getting tax back on these claims
Do I have to wait for the end of the tax year?
You can make a claim for the current tax year using the R40 form:
- put a X in box 1.8 on the first page to say this is an interim claim;
- for the boxes in section 2, estimate what your income from work, benefits will be for the whole tax year, don’t just put in what you have received so far.
But if you may get more refunds, it’s best to wait until all your complaints have completed before putting in an interim claim.
What if you get more than £1,000 in added interest during the year?
When the 8% interest on your refunds in a tax year add up to more than £1,000, you do have to pay tax on the extra so you won’t get all the tax deducted back – unless you don’t pay tax at all.
Suppose you had a large refund including £1,400 of 8% interest. The lender will have deducted £280 in basic rate tax but you should get a refund of £200 back.
You don’t have to do the sums and say what the refund should be. Just put the details of the interest and tax deducted on the form and the taxman will do the calculation.
What if not all refunds had tax deducted?
Sometimes you may get a refund with 8% interest added but no tax deducted. These were still taxable. So they need to be included in the “under or over a 200 tax deducted” calculation. It is possible you may end up owing the tax man money in this case.
PPI refund includes 8% interest of £800 and tax deducted £200
Payday loan refund includes 8% interest £600 and no tax deducted
Here you had a total taxable amount of 600 + 800 = 1400. 20% basic rate tax on this would be £350, but £200 is this should be tax-free so you should have paid tax of £150. £200 has been deducted for tax so you should get a rebate of 200-150 = £50
1st payday loan refund includes 8% interest of £500 and tax deducted £150
2nd payday loan refund includes 8% interest £1600 and no tax deducted
Here you had a total taxable amount of 500 + 1600 = 2100. 20% basic rate tax on this would be £525, but £200 is this should be tax-free so you should have paid tax of £325. £150 has been deducted for tax but this isn’t enough, so you actually owe the taxman 325-150 = £175.