PPI need-to-knows before it's too late
PUBLISHED: 07:00 07 May 2019 | UPDATED: 08:01 07 May 2019
The deadline to start a PPI reclaim is fast approaching.
And even if you have already reclaimed, double check if you had PPI on any products. And of course if you've never reclaimed, get your skates on and check if you're owed.
What is PPI mis-selling?
Payment Protection Insurance (PPI) was a policy designed to cover a year's repayments on a credit card, overdraft, loan, car finance or mortgage if you lost your job or were sick. PPI in itself wasn't a bad concept, but it was massively over-expensive and systemically mis-sold by banks and building societies.
Common mis-selling types include:
Lenders lying that it was compulsory (it wasn't) or it'd get you a cheaper loan
Having it added when people had said they didn't want it
Given it when it was inappropriate such as 'unemployment cover' for those who were self-employed, or not being asked about pre-existing conditions that could invalidate it.
Are you due tax back on your PPI pay out?
The money you get paid back for mis-sold PPI can have up to three main elements.
1. A refund of the PPI you paid.
2. If the bank (outrageously) added an extra loan to your original loan just to pay for the PPI – you get back any interest you were charged on this extra loan.
3. You get statutory interest (at 8pc a year, but not compounded) on the total of both those sums, for each year since you got the PPI.
Of these only the third element is taxed. It's automatically deducted at the basic 20pc-rate – i.e. £20 tax is taken for every £100 of statutory interest. This statutory interest is paid to try and return you to the position you would have been if you hadn't been mis-sold PPI.
Why are some owed this tax back?
PPI reclaims are taxed in the year they are paid back, not the year you took the policy.
On 6 April 2016 the personal savings allowance (PSA) launched. It allows basic 20pc-rate taxpayers to earn up to £1,000 a year of savings interest tax-free, higher 40pc-rate taxpayers can earn £500 and top 45pc-rate taxpayers don't get anything.
The statutory interest from PPI pay outs counts within this PSA.
Yet unlike savings which since then have been paid without any tax taken off, PPI pay outs still automatically have 20pc tax deducted before you get it.
So if, like most people, you haven't earned over your PSA in the year your PPI claim was repaid, you can claim it back.
If you're a taxpayer and the total interest earned from savings and PPI statutory interest is less than your personal savings allowance, you are due all PPI tax paid back. If the combined amount pushed you over the threshold, you should only pay tax on the amount of interest above it.
How to reclaim PPI payout tax.
There's a form online at HMRC to reclaim it – it's called the R40 form (or R43 if you're living overseas).
As it's a general form to reclaim extra tax paid on savings and investments, sadly it's quite complicated to fill in. I've written guidance notes to help at www.mse.me/PPItax.
Those who already filled in self-assessment tax forms, should've included the amount of statutory interest within that, in which case it was already taken into account.
If you're a higher or additional-rate taxpayers and didn't declare the extra statutory interest to the revenue in the year it was paid, you should let them know, as you only paid 20pc tax and it might need to be more.