Will I Need to Pay Tax on My Payment Protection Insurance Refund?

The simple answer is: no, not on the refund amount, but you do on the 8% interest. But only in certain circumstances.

If you were to receive a cash PPI refund, then you should receive 8% on top for every year that the policy was held. The interest then equates to the money that you would’ve earned if your cash had been stored in a savings account, and is normally given to claimants untaxed by the lender.

You’ll need to pay tax on the interest based on your tax band, basic rate tax is calculated at 20% with higher bands owing 40 or even 50%.

The positive news however is that because this interest is a one-off payment, you can pay the amount due without the need to enter it into the self-assessment system. You can make a payment to HMRC or ask them to take the money back across the course of a year.

Has the Amount Already Been Paid?

Before you make a payment, you must ensure that the tax hasn’t already been paid, some companies may have had the tax already deducted. If banks and lenders are paying out the interest, then there is absolutely no obligation on that company to deduct tax because the interest is not interest on a deposit.

Companies have an obligation to deduct tax from annual interest when it is paid. If a company deducts tax, then there is a requirement that advises the customer when making the payment that tax has been deducted and the gross and new amount of interest.

When you receive a refund letter from a bank or lender, they should tell you that you need to pay tax on the interest.

Tips to Remember

How much you owe will depend on your individual circumstances.

  • If you aren’t required to pay tax and have been deducted tax from the interest, then you might be able to make a claim to have a tax repaid by HMRC.
  • If you are a basic 20% taxpayer, and tax has been deducted from the interest then you won’t need to do anything more, unless you must complete a tax return.
  • If you are a higher rate taxpayer who received interest with or without tax deducted, or a basic rate taxpayer who has received interest without deduction of tax, then the interest should be reported to HMRC.