Should You Be Paying Tax on PPI Refunds?

Here at Precision Claims we are asked this question on a regular basis – do you pay tax on a PPI refund? Well, the answer is that you only need to pay tax on a small part of it.

You get a repayment back in three parts:

1.    Refund of the actual payment protection insurance payments made
2.    Refund of associated interest on the premiums
3.    Payment of 8% statutory interest

The 8% statutory interest is the only part that is taxable. The reason you are repaid this interest is because this is what that money would have earned in a savings account had you not spent it on the policy. You would have paid tax on it anyway and in comparison to the full amount owed to you it should be a small amount.

Examples are:

• If you were to receive £2,000 back, you would also receive £160 extra (the 8%). Only this £160 would be taxable, the rest would not be.
• If you received £400 back you would actually get £432 with the 8% added on, however you would only pay tax on £32 of that.

In summary, being taxed on a PPI refund will not make you any worse off – you will pay no more tax than if you had not taken out the policy. 

Does this tax get taken automatically when the money is refunded?

The bank should deduct it from the statutory interest when it is paid back to you. However, not all banks have done this. 

What Should I Do Next?

The first thing you need to do is find out if the tax was deducted at source by the bank that refunded you the money. Here at Precision Claims we can help find out this information and advise on what the next steps are. Get in touch now by calling us today on 0844 704 1945 or fill in the enquiry form on our contact page.