Do I need to pay tax on my PPI refund?
Currently, anyone who has successfully reclaimed a PPI payment, is required to pay tax on any interest added to their claim.
HMRC have confirmed that no tax will be due on any compensation received as part of a PPI refund, only on the additional interest paid.
It is usual that PPI refunds automatically include interest and therefore, if you are thinking about claiming a refund on mis-sold PPI, you should take into consideration the fact that you may face a tax charge.
The average PPI refund has been quoted as being over £3000. This sum will include added interest and so a significant amount of tax could be due if you are awarded this amount of money.
Why do I have to pay tax on a PPI Refund?
Interest is usually added on to a PPI refund automatically. This interest is intended to reimburse the claimant the amount of money that would have been paid as interest had the money been used as savings rather than paid on PPI. Apart from in special circumstances, interest on savings always incurs tax charges. The tax you pay on any added interest in a PPI refund therefore will equal the amount of tax you would have paid if your money had been placed in savings rather than paid on a PPI policy.
I have already reclaimed a PPI Refund how do I know if I have paid tax?
If you have received a PPI refund from a bank it is worth checking with them whether they deducted tax from the repayment amount or not. Some banks will automatically deduct tax from the interest added to a PPI refund but they are under no obligation to do this.
All companies other than banks have an obligation to deduct tax from the interest added to a PPI refund before the payment is made to the claimant. In these circumstances the company are required to declare that tax has been deducted and provide you with a breakdown of the gross and net interest amounts.
If you have used a third party to help you reclaim a PPI refund, and you have not been notified on whether tax has been deducted from the interest, it is advisable to contact the company to clarify the situation.
What should I do if I owe tax on my PPI Refund?
If, after contacting the company who repaid you PPI, you discover that the tax due on the added interest has not been deducted, you should contact HMRC directly to declare the tax due and arrange payment.
If you have already paid tax on your PPI refund interest you do not need to take any further action.
What if I don’t pay tax and I have paid tax on my PPI Refund?
If you are not eligible to pay tax but you have had tax deducted from your PPI refund interest, you can reclaim the tax by contacting HMRC.