If you have received a PPI or payday loan refund since April 2016 where tax has been deducted, you can probably get this back from the tax man! This post explains 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% interest has been added to your refund, this is treated like interest you have received on savings and it’s taxable as HMRC explain here.
Some lenders and banks don’t deduct any tax, they leave you to sort it out with the tax man. But many 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 of a payday loan refund one reader received from Wonga – it works the same way for PPI refunds, bank charges refunds and all similar sorts of compensation:
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 rule about savings interest
From April 2016 you are now allowed to earn £1,000 in savings interest without paying tax on it. (This amount is £500 for a higher rate tax payer, but in the rest of this article I’m assuming you pay basic rate or no tax.)
This applies to the 8% interest you have got on your refund. This interest is still taxable – that’s why HMRC haven’t changed their page saying that it is. But the new tax free band means that many people getting one of these refunds shouldn’t have to pay tax and, if it has been deducted, can claim it back.
The easy way to get payday loan refund and PPI tax back
To get this tax back, you can apply online or complete an 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 apply separately for each tax year. The current tax year runs from April 2016 to March 2017. 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 in boxes 3.1, 3.2 and 3.3. The picture shows what this would look like for the Wonga refund example above.
If you had several refunds 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 tax tax off;
- DO include any interest you received from taxable bank accounts;
- DON’T include any refunds where there was no 8% interest added, as these aren’t taxable at all;
- DON’T include any interest from ISA accounts 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.
Want it sooner?
If you don’t want to wait until the end of the tax year, you can make a claim for the current tax year:
- 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 have to pay tax on the extra.
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 about 2015/6 refunds?
For compensation received before April 2016, you can only get a refund if you weren’t a tax payer. Complete the R40 form for these refunds too.
Could PPI get you out of debt?
Can you get a payday loan refund
How 8% interest works for payday loan refunds
Fay says
Hello. I am hoping someone can help me?
So I have had several refunds with 8% interest added. It looks as so Wonga are the only one who deducted the tax. I am little confused as to I can only claim this or if I total up all the 8% interest totals and add them in there and only write in the Wonga deduction? Also, in the image soon on the article it shows entries inn 2,1 and 2.2 – do I add in my earnings to date and tax to date here?
I think I am being thick!!
Many thanks
Sara (Debt Camel) says
Yes you need to add up all the 8% interest you have received, including from the lenders that didn’t deduct tax.
As it is now February, it may be better to wait until after April so you can put your actual earnings and tax paid during the year, otherwise you have to estimate what these will be, not put the amounts received /paid to date in.
Fay says
Thank you. So by doing this, I should get a refund on all the 8%? I tried to speak on line with the tax office and they said it’s only the tax that has been deducted ie by Wonga. I don’t want to end up with a tax bill!!
Many thanks
Sara (Debt Camel) says
No, you can only get refunded what has been deducted!
Yes, you could get a tax bill – if the gross amount in 3.3 is more than £1000 for a basic rate tax payer, then you should be paying some tax and it may be that not enough has been deducted by the lenders. Obviously you don’t have to apply for a refund in this case … but really you should be telling the tax man you owe money.
Kee says
Confused, for higher rate tax payers, we calculate 40% of the 8% interest and can only claim back up to £500 paid? is that correct?
Sounds like being double stung!
Sara (Debt Camel) says
The 8% interest that is being added is compensation for the interest you could have received if you hadn’t had to pay the sums that are being refunded. It is therefore taxed as though it is interest you have earned.
This new tax free element is because the government has decided to give everyone a £200 rebate on any savings tax paid. For basic rate tax payers thie is equivalent to claiming back the interest on £1000 (ie at 20%), for higher rate taxpayers it is equivalent to claiming back the interest on £500 (ie at 40%)
This isn’t a double sting!
Kee says
So, my interest deducted by PDUK was £321.00 (it says at 20%) so when I attempt to claim back from the tax man, do I then owe money because it is actually £642.00? Help, i’m so confused!
Ignore my post below, I didn’t think it saved the first time!
Sara (Debt Camel) says
This is what your tax should be:
– the 8% interest addition is treated as savings interest and is taxable.
– You have to pay tax on this at your marginal rate – it sounds as though you are a higher rate tax payer so 40%.
– But you are entitled to the first £500 of savings income to be tax free.
– this tax free element happens once in a tax year. So if you have refunds from several different lenders you still only get one tax free element.
Some lenders such as PDUK are making a “first guess” at the tax by duducting basic rate tax from the 8% interest. This is wrong for almost everyone:
– if the 8% element is low, you can probably reclaim all the tax back as it will come in the new tax free element
– if you are paying higher rate tax, the 20% deduction is not enough
– if you had refunds from other lenders these matter for your actual tax calculation
– if you have any other savings interest.
Some lenders aren’t deducting any tax. That’s fine if the amount is less than the tax free band. It’s not fin if it is more than the tax free band or if you are over that amount when you take refunds from other lenders into account.
So… how much 8% interest have you received from these payday refunds in the 16/17 tax year? how much tax has been deducted? do you have any other savings interest in this tax year?
kee says
Hi, thanks for that,
No other savings, refunds 2016-2017 of 8% interest = £827.95 (they took off £165.59)
2017-2018 (refund yesterday) of 8% interest = £1,605.15 (they took off £321.03)
So, do I assume for example, the £321.03, should have been £642.06 and that I can claim £500 of that back?
(so basically the tax man will give me money back from last year but take from this year?)
I am not due any further refunds back and do not have savings so won’t have any further credit interest this year.
kee says
Ahh hang on, so I get back £178.79 from 2017-2018??
Kee says
So for higher rate tax payers, 40% should be deducted but only up to £500 is waived? sounds like being double stung
Sara (Debt Camel) says
Not really, 20% of 1000 is 200. 40% of 500 is also 200. So this way everyone will get a refund of £200 if they get over the 1000/500 limit.
Mitch says
Submitted mine today in just a couple of mins. Thanks Sara :)
Mitch says
1 Week later, cheque sent out for the amount claimed. Thanks again! :)
craig says
I had 3 refunds with a gross total of £1563.70 gross amount before tax was taken off. The amount of tax deducted was £321.47.
So if i read above correct i still need to pay tax on the extra as the total was over £1000??
The refunds have been from June 2016 until March 2017 and i am a basic rate tax payer.
Sara (Debt Camel) says
From what you have written (and obviously I don’t know anything about your other tax affairs, ie whether you have had other savings interest) it is likely that you would get a refund of £200 – this is the basic rate tax you have paid on the first £1000 of these refunds which should be tax free. That will leave you having paid £121 tax on the rest.
Craig says
Thank you Sara I checked the gov site and it says they have sent a response so i assume it’s coming in the post as no email. Will see what it says. Craig
Rachel says
I’m completing the tax form on the gross pay before tax what do I put if I have a salary sacrifice do I put the amount before the sacrifice or amount after? Thank you
Sara (Debt Camel) says
I’m sorry but I don’t know. The HMRC helpline is usually OK at this time of year (a nightmare in January) or even try the webchat? https://www.gov.uk/government/organisations/hm-revenue-customs/contact/income-tax-enquiries-for-individuals-pensioners-and-employees
Rachel says
Thanks Sara I think I understand it now this would just be a little extra bonus to get this back also
Rachel says
I’m confused now after reading this I had approx £750 tax taken from the interest I received, do I get that all back? Or just £200?
Sara (Debt Camel) says
Just £200
Mike says
I am also confused
my interest was £3,186
my tax deducted was £637
will i receive the £200 or owe the tax man?
Sara (Debt Camel) says
Was all this interest received in the same tax year?
Are you a basic rate tax payer?
Have you included all the interest you received, even where there was no tax deducted?
mike says
yes
yes
no, just this one refund, the others didn’t make it clear they had actually paid the tax
Sara (Debt Camel) says
OK, you need to know for all the refunds, the amount of 8% interest added and the amount of any tax deducted. Some may not have deducted tax even though they should have…
Frances Sinclair says
I received 2 PPI refunds in the 2016/17 tax year. The interest has been classed by HMRC as taxable income and has pushed me into the higher rate tax payer bracket, I still work and receive a pension from previous employment. I paid tax at source for both refunds. Are HMRC correct?
Sara (Debt Camel) says
The 8% interest is taxable income so if you were close to the higher rate tax boundary, yes this is possible. But have they allowed for the tax-free savings part?
Frances Sinclair says
Yes but only for £500?
Sara (Debt Camel) says
£500 is correct if you are paying higher rate tax , as 40% of that gives the same £200 you would save if you were a basic rate tax payer and paying tax at 20% on £1000.
David says
I was refunded at the beginning of march and the tax was taken out by wonga. I completed the r40 form online, and HMRC have come back saying they don’t owe me anything. The online form doesn’t give you a option to type in what you think was overpaid like the paper form. Is it possible wonga have paid the tax in the new financial year? I’ve had a few more refunds since so this year I wouldn’t be eligible to claim anyway.
Sara (Debt Camel) says
It doesn’t matter when Wonga paid it, the correct date for tax purposes is the the date you were sent the refund, so last tax year. You need to phone HZmRC and ask why it has been refused.
D says
Hi Sara, Im easily confused. What am I able to claim back if anything on this? Is it the £116? I filled in the online tax form but wasn’t sure where to fill in about this?
Thanks D
interest and fees
£2035.43
8% interest net
£466.29
total settlement
£2501.72
tax
8% interest gross
£582.86
basic rate tax deduction
£116.57
Sara (Debt Camel) says
Yes it’s the £116. The example and the picture in the article above show a similar situation.
Is this the only refund you have had in this tax year?
D says
I filled in the online form but its different to your examples and I sent it without putting in the info from the interest on the refund! lol do you know what section I was meant to add it, I just put in my P60 total earned and taxed and that was it.
Hope im allowed to do it again, I received it last October.
Sara (Debt Camel) says
If you haven’t put the details about the payday loan refund on the form it’s hard to imagine that is correct. I suggest you phone up HMRC and ask.
Claire says
Hi,
If you don’t claim this taxed amount back, would the HMRC eventually catch up and sort it out, please? Do you have to submit the form or could you sit back and get an extra £200 the next April for example?
I am not yet at that stage but would like to know ahead of time. Thanks for this and all you do on this site – a lifesaver as I’m just starting full-time study again at post graduate level so don’t get any help with childcare, this is going to help us so much! I had no idea the interest on 5 payday companies and two credit cards had cost me so much – about 10K, all within the last 6 years.
Sara (Debt Camel) says
I don’t think so. It’s not like PAYE problems which usually do get sorted. The PPI firm or payday lender doesn’t know your NI number or tax reference number so I doubt the amounts can be easily tied back to your tax account.