Interest on your PPI refund

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Many people have claimed back PPI either by making the claim themselves or by using a PPI claims management company.
There is some confusion however that some people are having to pay tax on the money they have received. Here’s why…

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 currently taxable.
So in the calculation, the PPI provider 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 tax man.

However it’s important to understand:
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 each year for the tax office, you need to include the details of interest you received in your PPI refund. The documentation and calculation provided by your bank will be important, so make sure you keep this letter safe.

You will need to tell HMRC about this interest in your Self Assessment tax return to make sure that you are paying the correct amount of tax.
If you are a higher rate taxpayer who pays tax at the 40% rate, you might find you 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.

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