If you have received a PPI or payday loan refund since April 2016 where tax has been deducted, you can probably get some or all of this back from the tax man!
Find out 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% notional 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 – 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 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, because 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. 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.
So how much can you get back?
This depends on whether you pay income tax and at what rate. The following are the simple cases, but remember if the 8% being added is very larger, it may push you over into the next rate tax band.
If you have a low income or don’t pay income tax at all
If you have an income of less than £17,850 then all your refunds should be tax-free and you should get a refund of all tax deducted. (Why £17,850? It’s the 2018/19 personal allowance of £11,850 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 Tax on savings and investments for details.)
If you are a basic rate taxpayer
If your income is over £17,850 and you pay basic rate tax, you can get back up to £200 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 though, 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 3200 you can get tax free)
- if you had between 3100 and £200 deducted, you can claim back some of this;
- if you hade over £200 deducted you unfortunately owe the tax man more. The extra is the same amount as the tax that has alrewady been deducted LESS £200 which is your tax free amount.
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 2018 to March 2019. 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 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.
Self-employed?
The R40 form and its online equivalent is designed for use by people who don’t submit a self-assessment form. If you are self-employed, don’t use the R450 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.
Want it sooner?
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 taxpayer. 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
N says
January 2, 2019 at 8:21 pmHi Sara
Just want to check I’ve got this right?!
By the end of this tax yr I’ll have earnt approx 14k in salary income. On 2 ppi claims I’ve received statutory interest totalling £1866.37 and paid interest at 20% on this, so I’m going to claim for a tax refund of £373.33.
Due to starting savings rates and personal savings allowance I am right in thinking that because of this I am entitled to the full refund of £373.33? As long i I don’t recieve interest on any other savings – which I don’t.
Thanks N
Sara (Debt Camel) says
January 2, 2019 at 8:48 pmYes that sounds right.
N says
January 2, 2019 at 9:03 pmGreat thanks!
Only other thing I’m concerned about is that I claim child and working tax credits – I’m going to have to declare the £1866.37 as income to them at renewal aren’t I??
N
Sara (Debt Camel) says
January 2, 2019 at 9:15 pmYes but they only apply for this tax year, not next. See https://www.moneyadviceservice.org.uk/en/articles/how-do-savings-and-lump-sum-pay-outs-affect-benefits and talk to your local Citizens Advice if you are unsure how to complete the renewal pack.
N says
January 2, 2019 at 9:23 pmOk great will make sure I declare it this tax yr then. Will give them a call to clarify as well.
Just found your website – great info and thanks for your speedy responses to my queries this will be my first stop I future 👍🏽
Michael says
January 8, 2019 at 4:38 pmHello. I really need some help with filling out an R40 form online in light of a recent PPI payout (Barclays Loan)!
Breakdown (as per recieved letter):
Refund of PPI premiums paid : £737.86
Refund of interest charged on the premiums paid : £86.03
Statutory compensation : £1095.77
Less any previous successful claim(s) : -£0.00
Less any previous refunds made directly as a result of this policy : -£0.00
Lee any statutory compensation already paid : -£0.00
Deduction from statutory compensation interest for income tax at 20% : -£219.15
Total refund due : £1700,51
Assuming I am looking at the correct R40 section, I am being asked:
Net interest paid by banks, building societies etc, purchased life annuities and PPI payments (After tax taken off) : £???
Tax taken off the gross interest paid by banks, building societies and purchased life annuities : £???
Gross interest paid by banks, building societies and purchased life annuities : £???
Do you receive interest that has not been taxed at all? Yes/No
I need help filling in the blanks (???). Many thanks in advance!
Sara (Debt Camel) says
January 8, 2019 at 4:45 pmThe bit of your refund which is taxed is the statutory compensation so £1095.77
That has had £219.15 taken off (you will see that that is 20%)
So the net interest paid for this refund is 1095.77 minus 219.15.
I can’t tell if those are the numbers to go into the R40 form as it will depend on whether you received any other taxed savings interest. Also I don’t know if you received any gross interest on your savings elsewhere.
Michael says
January 8, 2019 at 6:13 pmThank you so much! As for your other considerations (thanks for these), the answer to both is ‘no’, so I will enter the figures as per your guidance. Thanks.
I says
January 25, 2019 at 6:00 pmHi, Thanks for all the info on your pages – most informative. Hope you can assist me as I expect my PPI refunds to take me into the higher rate tax bracket from what I have gleaned on this site. I am a basic rate tax payer without the PPI refund. But confused as I was under the impression that one could have earned income up to £ 17,500 and not have to pay any more tax on the PPI refunds already taxed at 20%
My questions are : 1) Am I correct the interest paid is added to earned income and the total is classed as ” income ” and therefore if the total is over £ 33,500 for the tax year 2017-2018, (after the personal allowance of £ 11,500 is deducted) then one becomes a higher rate tax payer by default?
Tax was deducted at 20% from the payment made to me, but I assume a further 20% would be due?
and 2 ) how do HMRC treat the payment in advance due since the PPI interest is a one of event ?
Sara (Debt Camel) says
January 25, 2019 at 6:36 pmTax is only due on the 8% interest element, not any associated interest.
If you are taken over into the higher rate bracket, additional tax is only due on the part that is in the higher rate bracket, not it all.
Advance payment, you can just ask for them to be reduced – to zero probably – as the PPI refund was a one-off.
Sali says
February 26, 2019 at 10:07 amIn respect of the question above, I currently earn £17,000 and have received PPI refunds this financial year. The clam was made through a company who have paid HMRC direct, this totals around £1200 (rough figure as I do not have it in front of me). I am quite confused as to whether I should claim this back? The letter from the company says if I have savings under £1000 I can do this – I have no savings.
I have looked at the form but not sure where to start and with the comments about then being a higher rate earner through the payments I don’t know if I should!
Any clarity on this would be greatly appreciated.
Sara (Debt Camel) says
February 26, 2019 at 12:26 pmIf the HMRC payment was £1200, then presumably the 8% element of your claim came to about £6000?
Then £6000 is treated as income. if you earn £17,000 that is nowhere near enough to take you into paying higher rate tax – that starts at over £40,000. So you i think you should try to claim £200 back. You should have been sent all the figures on the refunds by the claims company.
Pam Poole says
May 2, 2019 at 11:14 amDoes mbna stop tax when paying back ppi . Also and send it to tax man Does Mark’s and Spencer deduct tax
Sara (Debt Camel) says
May 2, 2019 at 11:26 amWhen you get the refund, it will say if tax has been deducted.
Mr&MrsC says
January 26, 2019 at 11:48 amThank you for this Sarah. I have just got £141 and £125 back from HMRC for two lots of refunds from ppi. Took minutes to fill in the form and 6 weeks for the cheque to arrive.
TJ2 says
February 8, 2019 at 9:00 pmHi
I received a ppi payout which was sent to the Official Receiver as I had been made bankrupt in 2007 and the refund counted as an asset as it pre-dated the bankruptcy. I have just received a tax statement which advises that I owe a fairly large sum in un-paid tax all related to the compensatory interest paid as part of the claim. This was notified directly to the revenue by the refunding bank. surely I don’t now have to spend over a year paying back tax on an amount of money I never received – this seems more than unfair?
Sara (Debt Camel) says
February 8, 2019 at 9:02 pmIf you talk to the OR they will normally help you get the tax bill sorted.
Stephen Robson says
March 6, 2019 at 5:23 pmHi
I have received my PPI and the tax deducted and paid directly to HMRC was £1450, I have been told by HMRC I am owed £12.42 (they asked if I wanted a cheque sent immediately and I declined) and I am struggling to understand how they work this out. The gentleman on the phone couldn’t explain really, saying that is how it has worked out and I don’t get the full amount paid – my PPI pay out was round about £7k and I earn £30k so this would not have taken me in to a higher tax band. Does any of this sound correct? They told me my paperwork would be sent in about three weeks and I have already been waiting 7 that’s why I phoned.
Sara (Debt Camel) says
March 6, 2019 at 5:39 pmIt sounds odd – but you need the paperwork to see what they have calculated.
Joanne Tobertson says
March 28, 2019 at 8:17 pmHi
I was wondering if you can help with making the decision if I should bother completing the form r40.
I earn £19406 and I got back some money from ppi, the tax deducted totalled £214, is it worth me asking fome the tax back?
Sara (Debt Camel) says
March 28, 2019 at 9:15 pmFrom what you have said, you should be able to get £200 back. You aren’t close to the higher rate tax band, so there shouldn’t be any problems.
Nats says
April 1, 2019 at 11:56 amHi Sara,
Just querying something. I received a 4k redress from WDA in July last year which they withheld tax from. I do pay tax but am below the higher rate band. What can I claim back for this? just £200? Thanks in advance
Sara (Debt Camel) says
April 1, 2019 at 1:17 pmyes, just £200 in each tax year. Not £200 per refund.
Neil says
April 1, 2019 at 4:41 pmHi,
Do you have to have a tax deduction certificate from the lender in order to be able to claim the tax back?.
I asked Ferratum for one two weeks ago and they haven’t replied . When i called them up they said to e-mail customer care so I did and still nothing.
The adjudicator said in his assessment of my case that they must provide one if I request one.
Sara (Debt Camel) says
April 1, 2019 at 4:46 pmYou don’t need to include the certificate with your form to HMRC and I don’t think they ask many people for one… but if you are asked you will need to produce it. I suggest you email Ferratum again with COMPLAINT in the title and say if they don’t send you one you will be sending FOS another complaint and asking for compensation for the hassle.
Trev says
April 1, 2019 at 9:36 pmHi Sara
Sorry I have a question regarding tax refund. I have read your section on this issue and wonder if you could just clarify some questions?
(Apologies – Tax always confuses me!)
During Tax Year 2017-18 I received three substantial refunds and received the 8% interest with the 20% tax reduction paid on each one.
The total tax paid on the interest for each was £1100, £180 and £97 respectively. I am on the 20% tax income bracket.
My questions are:
1. Would I be entitled to a tax refund on these amounts? (Is the tax free total capped at £1000 for the financial year on each amount or the total?)
2. The refund of monies other than the interest is definitely not taxable ? (Don’t want to seek a refund and find they want to tax that as well!!)
3. To claim, do I have to make separate claims or can they be grouped together on one form ?
I would be grateful for your advice.
Thanks
Trev
Sara (Debt Camel) says
April 1, 2019 at 9:52 pm1. £1000 for the financial year on the total, not each payment
2. definitely not taxable! Unless you have received some refunds where the lender didn’t take tax of the 8% element, you should be fine.
3. 1 claim for each tax year is best.
Trev says
April 1, 2019 at 10:47 pmThanks Sara!
So i should just put the one claim in for the £1100 payment and should receive £1000 back and just forget the other 2 payments?
And the refund takes about 6 weeks to be processed?
Sorry – Tax always confuses me…
Trev
Sara (Debt Camel) says
April 2, 2019 at 8:45 amNo, you need to add up ALL your refunds and put the total on this form. HMRC need the total because they need to see that it isn’t taking you over into higher rate tax.
Reen says
April 1, 2019 at 11:29 pmI will have had roughly about 16000 earned income and tax taken off for about 450 and 90 from refunds, will I be OK to put both on one tax claim although I havent yet received the refund but it has been confirmed today and will most likely get in the 2019/2020 tax year. Reason for asking is I am hoping I can claim all in this tax year as hopefully 2019/2020 tax year I will have more refunds to put in. Thanks Sarah
Sara (Debt Camel) says
April 2, 2019 at 8:38 amI don’t know, I think you may have to ask HMRC. My instinct is that it is the date you receive the payment that matters, so that would push them into next year, but I am not a tax expert and I may be wrong!
Reen says
April 3, 2019 at 5:20 pmThanks Sarah, I am also looking into this and seen I had 16000 earned income (hoping to get my tax refund on this as paid too much tax anyway) plus I received 2367 8% interest less the tax about 473 so I can only claim the 200 back or will I get the whole tax back which I paid. Tax is so confusing on savings!
Sara (Debt Camel) says
April 3, 2019 at 9:12 pmYou don’t have to specify how much you are claiming back. Just send them the form and HMRC will calculate it.
Angela Cheshire says
April 2, 2019 at 7:39 amJust a quick question regarding tax refund on interest. Can you only claim at the end of the tax year ie interest refunded in April 2019 and tax deducted do you have to wait till April 20 to claim refund? Thanks
Sara (Debt Camel) says
April 2, 2019 at 8:13 amno, you can claim mid-year but then you will have to give estimates for all the rest of your the income that you will get in the year.
Trev says
April 2, 2019 at 12:59 pmHi Sara
Sorry I am really trying to get my head around this.. (apologies for my stupidity!)
The following would be my totals for the financial year 2017/18.
A total of £6905.00 received in 8% interest. A total of £1381.00 taken from this in tax.
Am currently on the 20% tax bracket (£25K income).
What would me refund be (if any?)
I promise I will leave you in peace after this!
Thanks
Trev
Sara (Debt Camel) says
April 2, 2019 at 1:10 pmfrom what you have said, £200
Lesley says
April 4, 2019 at 10:31 amHi Sara
Would you please be able to clarify something for me. I have just received £1099 from a ppi claim:
£1205.02 awarded and 105.48 (tax deducted 20% of 8% statutory interest £527.39. Is this worth claiming back by via a R40
My salary is £17,000 but I also get working tax credits and child tax credit. Will this effect this if I do claim.
Thank you
Les
Sara (Debt Camel) says
April 4, 2019 at 11:21 amIts up to you if you think it’s worth filing out the form to get the refund. Asking for a refund shouldn’t affect your benefits.
Paula says
April 14, 2019 at 12:20 pmHi I earn £23800 a year I received a ppi of 2798 ,£300 taken for HMRC would I be able to claim refund?
Sara (Debt Camel) says
April 14, 2019 at 2:21 pmFrom what you have said, you should be able to claim back £200 of that tax deducted.
Karen says
April 15, 2019 at 9:11 pmHi Sara
We have had successful PPI refunds and hsve heard we can claim back refund on the tax paid .not sure if this applies to us as our circumstances changed and we no longer pay tax . We have no savings. One PPI was taxed in the region of £800 and the other in region of £1200. Should we complete R40 for HMRC or does it not apply to us . Thanks
Sara (Debt Camel) says
April 15, 2019 at 9:54 pmIf you are a basic rate tax payer, you can’t get more than £200 back, but if you don’t pay tax you may be able to get more. So fill out those forms!
Karen says
April 16, 2019 at 9:03 amThanks Sara . Most helpful will attempt to get round that form .
Karen Archer says
April 24, 2019 at 8:36 amHello. I really need some help with filling out an R40 form online in light of a recent PPI payout (Barclays Loan)!
Breakdown (as per recieved letter):
Refund of PPI premiums paid : £165.99
Refund of interest charged on the premiums paid : £45.01
Statutory compensation : £228.92
Less any previous successful claim(s) : -£0.00
Less any previous refunds made directly as a result of this policy : -£0.00
Lee any statutory compensation already paid : -£0.00
Deduction from statutory compensation interest for income tax at 20% : -£45.78
Total refund due : £394.14
Assuming I am looking at the correct R40 section, I am being asked:
Net interest paid by banks, building societies etc, purchased life annuities and PPI payments (After tax taken off) : £???
Tax taken off the gross interest paid by banks, building societies and purchased life annuities : £???
Gross interest paid by banks, building societies and purchased life annuities : £???
Do you receive interest that has not been taxed at all? Yes/No
I need help filling in the blanks (???). Many thanks in advance!
I dont not have any savings etc. so the claim would be this amount just dont know what to fill in…Could you please help
Many thanks
karen
Sara (Debt Camel) says
April 24, 2019 at 8:59 amonly the “statutory compensation” is taxable. So from what you have said:
Net interest paid by banks, building societies etc, purchased life annuities and PPI payments (After tax taken off) : £183.14 [that is the gross interest minus the tax deducted]
Tax taken off the gross interest paid by banks, building societies and purchased life annuities : £45.78
Gross interest paid by banks, building societies and purchased life annuities : £228.92
Tim says
April 30, 2019 at 12:52 pmHi Sara
Mi have recently come across this article but I am not sure if it may benefit me.
My gross salary is 50k im paying tax of 40%.
I have payday loans refunds to date totalling around £900 – I still have 5/6 complaints awaiting a final response.
From the article I read I can claim up to £200 back from what has been deducted by HMRC.
Is it worth me pursuing this – given I am paying at 40% tax bracket.
Thanks
Tim
Sara (Debt Camel) says
April 30, 2019 at 1:06 pmSorry you will have to do the arithmetic. You may owe the taxman money.
For any refunds in the last tax year, you can do this now.
For this tax year I suggest you wait until all are resolved and do it once.
Janet says
May 7, 2019 at 7:02 pmHi – I will be claiming my tax back from interest paid on a PPI claim however the payment was made direct into a joint bank account – the PPI claim was in my name – will that make a difference to my claim – will myself and my partner need to claim for it jointly – i.e. 1/2 of the allowance – I am a basic tax payer but he is a non tax payer ?
Sara (Debt Camel) says
May 7, 2019 at 9:17 pmI’m not a tax expert, but as the claim was paid to you, I think it should all be claimed back by you.
Gary says
May 24, 2019 at 3:00 pmSara,
When filling out the R40 online, I put the claim under UK interest part, is this correct? Only I’ve had the form returned to me with a letter saying tax should not be deducted from bank or building society interest, so it’s like they don’t recognise it as PPI reclaims that have had the interest taxed. They have asked me to send the relevant backup and return to them, so I’ll do that, but I just wanted to check I’d claimed under the correct heading?
Thanks,
Gary
Sara (Debt Camel) says
May 24, 2019 at 3:08 pmyes, UK Interest. Let us know what happens!