If you’re in the process of organising your PPI claims, no doubt you have some questions about what happens if you receive a refund.
A question we frequently get asked at Canary Claims is about what happens when you receive your refund. When will you get the money? How will you get it? Is the PPI payment taxable? How should I pay Canary Claims?
All valid questions. But in this article, we’re going to discuss if PPI payments are taxable, as we know a lot of people want to know the answer to this.
There is a lot of confusion about the tax on PPI refunds, due to changes to tax on savings in 2016. Read below to find out if you need to pay tax on your PPI payout and how you can do so.
Are PPI Payments Taxable?
The short answer to this question is yes, but only in certain circumstances and not on the whole claim amount.
When your PPI claim is successful, you will receive a full breakdown of the money you are due back. There will be three items listed:
- The refund amount that you paid for your PPI policy
- Any interest you paid on the PPI policy
- Statutory interest (currently 8%)
If the statutory interest is over £1000, you will need to pay tax on this.
This is due to the Personal Savings Allowance, which was introduced in 2016. This means that the first £1000 of interest on savings is tax-free if you’re on the basic rate tax. For higher-rate taxpayers, the threshold is £500.
Let’s look at two examples.
Customer A wins their PPI claim and receives a refund from the bank. The breakdown is as follows:
PPI policy: £3000
Interest on the policy: £500
8% Statutory interest: £400
Total payout: £3900
Customer A would not need to pay tax because the statutory interest is less than £1000. The only circumstance otherwise would be if customer A already has interest from another form of savings and, including the £400, it amounts to over £1000.
Customer B wins their PPI claim and receives the following breakdown from their bank:
PPI policy: £6600
Interest on PPI policy: £1200
8% statutory interest: £3700
Total payout: £11,500
Customer B received over £1000 in statutory interest meaning they will need to pay HMRC tax on the £3700 (tax at 20% = £740).
How Do I Pay the Tax on My Statutory Interest?
When a bank or lender pays your PPI refund, many will automatically take off the tax and pay it to HMRC. This will be noted on the breakdown of your refund, which is why it’s so important to check your paperwork when you receive it.
In some circumstances, the bank might automatically take off the tax, but your 8% statutory interest isn’t over £1000. In this case, you can apply for a tax refund.
However, many banks to do not automatically take the tax off for you, meaning you will need to let HMRC know. If you are self-employed, you can do this through filing a self-assessment. If you are employed, contact HMRC with the amount of statutory interest you received (if over £1000 and you are on basic rate pay) and arrange the payment. You can visit the Gov website for more details.
If you have doubts about whether you need to pay tax, call HMRC to confirm. You don’t want to be caught out by not paying the correct amount of tax.
Remember, you only have until 29th August 2019 to make your PPI claim. Don’t miss the opportunity to make a claim before it’s too late.
Use our PPI claims calculator to learn how much you could receive from your PPI refund. At Canary Claims, we can make a claim for you for free and offer a low fee of only 15% + VAT (18% total) on successful claims.