If you have received a refund from a lender, you may see that there is an “8%” element included. This applies in many situations, including PPI, affordability refunds and NOSIA refunds. Often the lender will have deducted basic rate tax from this 8% part.
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.
Contents
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 taxman 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 explains 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.
But you are allowed to earn some interest without paying tax
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 push 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.
As an example, take the refund already mentioned:
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
From these you need 3 figures for the R40 form. Ignore the refund element – that is not taxable. Instead focus on the 8% element – you want the gross figure (481.27), the net figure (385.02) and the tax deducted figure (96.25).
Here is how you put them into the R40 form:
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 from 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 an 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.
Example 1
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
Example 2
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.
What to do if you can’t pay a tax bill
How 8% interest works for payday loan refunds
Unaffordable car finance – your options
L says
Hi Sara,
I’m finally getting round to doing this. I’m on ESA, Will claiming affect my benefits? Also, I can only see a form that can be sent, not done online, unless you’re self employed. Does that sound right?
These are my figures:
Interest to be refunded: 1941.60
Tax deduction: 388.32
Interest after tax: 1553.20
Does the £1000 cap on interest mean I won’t get the whole 388.32 back? I’ve also been worrying about doing this in case it affected my benefits, which are minimal and I struggle to live off as it is.
Many thanks as always.
I’ve read the article and looked through some comments but couldn’t see this, so apologies if you’ve answered this before. This stuff boggles me at the moment.
Sara (Debt Camel) says
It sounds as though you will come under the If you have a low income or don’t pay income tax at all section in the article above?
Reclaiming tax will have no impact on your benefits unless it leaves you with over £6000 in the bank – which sounds unlikely.
L says
Okay, I’ve reread it, thanks (still boggles me to be honest – but definitely don’t earn 18,000. More like 6,000). I’ll print out the form and see. Thank you.
Antony K says
Good morning
I received a large payout from provident in Oct 2020. It was about 25k plus.. Provident never sent me the break down for my second cheque after ombudsman decision.. One cheque was 4k and the other 23k.
Should I contact provident for a breakdown showing the tax and would it be worth my while trying to claim tax back?
Sara (Debt Camel) says
What was the tax deducted on the first 4k?
Are you a basic rate taxpayer?
Antony K says
Hi Sara
Thanks for reply
Yes I’m a basic tax payer.
Tax deducted on 4k was £345.
Sara (Debt Camel) says
If you are a basic rate tax payer you can only claim back £200 of the tax deducted. So a claim for the 4k part you have the details for will use that up.
Antony K says
OK will do.
Thanks for advise Sara.
Would never have got the massive pay out if I hadn’t came across this site.
Basic tax means I’m PAYE I guess?
Sara (Debt Camel) says
If you are paying tax through PAYE and you only pay basic rate income tax – that is what is important. If you earn too little to pay income tax then you can potentially get a lot more of the tax deducted reclaimed. If you are a higher rate tax payer you will get less.
Antony K says
I earn approx 30k a year.
Should I go with what you originally said.
Again thanks in advance for your advise
Sara (Debt Camel) says
yes, that is in the middle of the basic rate tax band.
Antony K says
OK great
Thanks again for all your help I will submit the return on the 4k cheque.
Good luck to you all and merry Christmas.
Lee Sharratt says
Hello. Had. A claim with a company. Waited 24 months. To be told no money is due back. When there clearly is when I had 1000s in refunds
Sara (Debt Camel) says
What sort of claim? Which lender?
Lee sharratt says
Claiming my tax back for my payday loans . With several companies
Sara (Debt Camel) says
And for each of these you were sent details of how large the 8% element was of your refunds and how much tax was deducted? Who are the lenders?
Lee sharratt says
Too many lenders, soMe no longer here. Hmrc said no record. Basically fobbed off. I’ll forget it 😡
Sara (Debt Camel) says
few people have had problems with this.
Heath says
Hi Sara I been waiting 6 month for tax refund from a company called reclaim tax refund which they said they would claim it back for me I have email them and they said that I have to wait for hmrc letter can advice me what to do
Sara (Debt Camel) says
Using a company to reclaim this is a bad idea but now you are in the middle of it I don’t know if you can do anything apart from wait.
Heath says
OK Sara would it help if I phone hrmc
Sara (Debt Camel) says
I don’t know, sorry I can’t guess what your claim firm has done.
tom says
Hi Sara
The financial ombudsman have found in my favour and said Loans 2 go need to refund interest plus pay 8% statutory interest minus tax
Please note that following the redress calculation – to be conducted by the lender – we would expect tax to be deducted from the total amount of redress payable and not just on the simple statutory 8%.
I would of thought it would be just off the 8% tax would be deducted
Thanks
Sara (Debt Camel) says
That is very odd – have FOS explained why?
Tom says
Hi Sara
When I asked them received the following reply
My understanding is that the entirety of the redress in itself is considered an income, irrespective of how it’s made up – and is therefore tax deductible. But we’re not taxation specialists so as mentioned previously, if your circumstances dictate it – we would encourage you to speak to ‘HM revenue & customs’ on the matter
Sara (Debt Camel) says
That is wrong. And not what FOS usually says. Here is one decision chosen totally at random: https://www.financial-ombudsman.org.uk/decision/DRN-3090720.pdf
That says:
To put things right I think Madison should:
– refund all interest, fees and charges Mr A paid towards the loan;
– add 8%* simple interest on the above from the date of payment to the date of
settlement; and
– remove any adverse information about the loan from Mr A’s credit file.
*HM Revenue & Customs requires Madison to take off tax from this interest. Madison must give Mr A
a certificate showing how much tax it’s taken off if he asks for one.
So the tax deducted only refers to the 8% tax.
I suggest you go back to your adjudicator again, point them at this, suggest they talk to their supervisor and correct their decision.
Deb says
Hi Sara
Thank you for this website explaining the details of refunds for PPI with the HMRC R40.
Please could you help me understand the figures I have been presented with from a refund of mortgage PPI as I cannot reconcile the 20% element or gross/net values and work out which figures I need to put in the relevant boxes 3.1/3.2/3.3.
I wonder if the Building Society calculations are correct?
Refund it premiums paid- £1594.02
Plus 8% interest- £690.92
Less 20% tax in interest – £172.73
Total payable by cheque – £2284.94
Thank you for your help.
Kind Regards
Sara (Debt Camel) says
For the boxes, the net interest is 690-172=518, the tax taken off is 172 and the gross amount is 690
I have no way of telling if the Building society has calculated the refund of premiums or the 8% interest correctly.
MikeW says
Hi I got paid the refund I was due after my complaint was upheld recently, it was a few thousand so there was also 1400 or so in interest.
The bank took off the tax first before sending to me as expected, all fine and I will claim back as I earn under 15k a year.
My question is, I recived the money in my bank on 7 April but the bank letter detailing their payment to me was dated 5 april. So I guess they pfficially paid it in the tax year just finished. but it didnt arrive in my bank til the new tax year, so which tax year should I enter this payment on my self assesment? 2021-2 or 2022-3? I normally do my accounts on a cash basis so I guess 2022-3 but I don’t want to get it wrong, thanks
Sara (Debt Camel) says
You are self employed? I suggest you ask your accountant.
Nats says
Does anyone know how long HMRC take with these refunds?