(Last updated: November 2023)

The deadline for clawing back your Payment Protection Insurance payments for wrongly sold policies expired on the 29th of August 2019. Hopefully, you got your claims filed in time and got your cash back – but there’s a chance you could still be owed more, even now. Here’s what you need to know about PPI tax refunds.

Are you owed a PPI tax refund?

A lot of people don’t realise that part of their PPI payout was taxed at source automatically. That means, if you weren’t eligible to pay tax for the year, you probably got short-changed and can apply for a PPI tax refund.

A quick guide to PPI

Payment Protection Insurance policies were designed as a safety net to help stop people from getting into financial trouble with debt repayments. They generally applied to things like loans, mortgages and credit card balances. The basic idea wasn’t actually bad. Your PPI agreement would keep your repayments covered if you lost your job or were too ill to work, for instance.

Even so, there was a problem with how these policies were sold. PPI deals grew into a big money-spinner for lenders, so they basically started to ram them down their customers’ throats every chance they got – even if they weren’t needed, wanted or useful. In fact, many customers never even realised they were signing up to a PPI agreement in the first place. If you didn’t squint hard at the small print of your agreement, those details could be easy to miss. Even worse, some people were being sold PPI policies that they didn’t even qualify for and could never use. Self-employed people were a good example of this.

Eventually, the authorities caught on to what was happening and dragged the PPI sellers back into line – kicking and screaming all the way in some cases. Single-premium PPI policies were banned outright in 2009, and lenders were forced to start taking complaints seriously. Over time, this has left a lot of people being owed PPI refund payouts due to wrongly sold agreements.

What got taxed?

As with any kind of tax refund, what you’re getting back in a PPI refund is money you should never have paid in the first place. This is why your refunded PPI payments themselves aren’t taxed. However, the rules for PPI refunds say you actually get back more than just your original payments. You also get some interest on them. The idea is to help put you back where you should’ve been financially by now if you hadn’t been wrongly charged for PPI in the first place. So, on top of your actual payments, you’re also getting:

  • Interest on any additional loans that might have been dumped on top of your existing ones to fund your PPI payments (yes, this actually happened to many customers).
  • Another 8% per year on top in statutory interest.

In the taxman’s eyes, that 8% interest is no different from any other kind of interest you might be getting – and here’s where things get tricky.

Since 2016, the Personal Saving Allowance (PSA) has meant that most people can earn up to £1,000 a year in interest without paying tax on it. That tax-free allowance applies to the 8% interest you’re getting on your PPI payout. If you’re paying Income Tax at the higher rate, you’ve got a lower tax-free cap of £500 instead, while anyone who’s taxed at the additional rate gets nothing. The thing is, most of those PPI payouts have still been getting taxed at the basic rate of 20%, even if they shouldn’t have been. That means you could still be owed money whether or not you were making enough to pay tax.

The tax you pay is worked out based on the year you got your payout, so if you were earning less than your tax-free Personal Allowance then, you shouldn’t have been taxed on your payout at all. If you got your payout after April the 6th 2016, you should also have got the benefit of your Personal Savings Allowance.

How to apply for a PPI tax refund

There’s a hard limit of 4 years on getting back any tax refunds you’re owed by HMRC. Depending on when you received your PPI repayment, you could still have time to get the tax refund that ought to come with it. For instance, if you got your payout in the 2019/20 tax year, you’ll have to apply to get it back by the 5th of April 2024. Otherwise, you’ll lose it forever.

Use form R40 to apply for your PPI tax refund.

Get help with the R40 form

There’s an R40 form on the HMRC website here to get you started.

If the thought of dealing with HMRC or possibly getting something wrong puts you off applying for your PPI tax refund, RIFT has your back. Get in touch and we’ll get the wheels rolling for you. Just one more reason why you’re always better off with RIFT.

RIFT are the UK's leading tax refund and tax return experts and we’ve been in the industry since 1999. Use our tax rebate calculator to get an instant estimate of how much cash you could be owed back from HMRC.