Thousands of Brits could be owed hundreds of pounds by the taxman after having a successful PPI claim.
It is common practice for lenders to deduct income tax at source from any PPI compensation paid out to successful claimants – but not everyone should be paying that tax.
The lenders deduct tax at the basic rate of 20%, but if you are a non-taxpayer then you have the right to claim all of the money back from HM Revenue & Customs (HMRC).
Even if you are a taxpayer you might still be able to claim the money back if you received your compensation in the last four years.
Personal savings allowance
In April 2016 the personal savings allowance was introduced which allows taxpayers to earn up to £1,000 a year tax free on their savings which includes the statutory interest paid on PPI claims.
PPI compensation has three elements – a refund of the actual premiums paid on the policy, any interest charged by the lender on the payments and a statutory 8% annual interest on both of those sums. But only the statutory interest is taxable as it is, effectively, earned income
How much and when?
Amounts which can be reclaimed vary. Someone receiving a £1,000 payout on PPI taken out three years ago could be owed £40*, but if you got back £3,000 on a policy taken out 10 years ago your tax refund could be £300*.
A refund of £15,000 on a policy taken out 10 years ago could get you back £1,470*.
PPI payouts are taxed in the year the money was received and not the year the policy was taken out. So this year, if your income including the tax paid on your PPI claim is less than £12,500, you can claim all the tax back.
The bad news is that if you are a taxpayer you can only go back four years, but if you were a non-taxpayer there is no restriction on how far you can go back.
How to claim
The tax must be claimed back direct from HMRC. Details are available online and the R40 Claim a refund from tax deducted by savings and investment form can be either filled in on-screen or printed off and posted to the taxman.
If you need additional help it is available on the HMRC income tax helpline 0300 200 3300.
* all figures are based on estimates and not full calculations