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Why do I pay tax on my PPI refund?

Paying tax on my PPI refund – Why is there tax deducted from my PPI interest payment?

If your bank has agreed to your PPI complaint they will provide you with a full breakdown of the refund calculation.

The total of your premiums will be shown in the calculation along with any interest that you have been given on that total. The standard practice is for banks to apply an 8% simple interest on your total PPI premiums.

From an income tax point of view, any interest you receive from a bank is taxable under current HMRC rules. (Note: there are tax free interest rules coming into effect soon so this may change, but it is correct at the time of writing)

So in the calculation, your bank will show that 20% income tax has automatically been applied to the interest on your PPI refund.

This tax will be paid directly by the bank to the HMRC.

Important: To be completely clear;

You DO NOT pay tax on the total PPI refund.

You only pay tax on the “interest” part of your PPI refund.

Q. Do I need to do anything else?

If you complete a Self Assessment tax return every year for the HMRC, you need to include details of the interest you received in your PPI refund. The documentation and calculation provided by your bank will be important, so make sure you keep this document safe.

You need tell HMRC about this interest in your Self Assessment tax return to make sure that you are paying the correct amount of tax.

For example, if you are a higher rate taxpayer who pays tax at the 40% rate, you might need to pay additional tax.

This is because the interest on your PPI refund was taxed automatically at the standard 20% rate, but as you are in the 40% tax band you need to pay another 20% tax on that interest.

When you complete your Self Assessment tax return, HMRC will go through everything you have told them and work out how much tax you owe.

Does this help explain the tax implications of your PPI refund?

Please ask any questions below.

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