What is tax on PPI
Payment Protection Insurance (PPI) was mis-sold for decades, and from 2005 people started to claim back tax on PPI.
By August 2019 the compensation topped £36 billion, with the average payout being close to £2,000.
Many people don’t know that the PPI payouts are taxable, and most were paid after the tax was taken off, meaning some people have overpaid the tax.
How to Claim Back the Tax
The issue is that most lenders paid out the PPI at the basic tax rate of 20%. If you are a non-taxpayer, then you can claim the whole tax amount back from HMRC.
Even if you are a taxpayer, the interest on the PPI was also taxed. However, since April 2016 there has been a savings allowance of £1,000 per year tax-free. Since this date, most interest has been paid out after tax has been deducted.
When the PPI was paid, they included statutory interest on the PPI, which counts the same as savings interest. This was also paid after the tax was taken off.
The PPI payout is taxable at the point it was received. This means that if you received the payout after 5th April 2016, then any unused £1,000 savings allowance should have been used against the PPI statutory interest.
If you were a basic-rate taxpayer at 20%, then there will not be a lot to claim back, as the 20% was automatically taken off, potentially totalling hundreds of pounds a year.
You should be aware that you can only claim tax back for four years as well as the current one, meaning the furthest back you can reclaim is the 2017/18 tax year. If you don’t act now, you could be missing out on a large reclaim.
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