Are Payment Protection Insurance (PPI) payouts taxable?

Full answer

Payment Protection Insurance (PPI) mis-selling compensation was one of the largest consumer redress exercises in UK financial history, and its tax treatment still causes confusion years after most claims were resolved. **Two separate elements of a PPI payout** A typical PPI compensation payment has two parts: a refund of the PPI premiums you originally paid (plus any interest you paid on those premiums if they were added to a loan), and statutory interest, usually calculated at 8% per year simple interest, awarded to compensate you for having been out of pocket during the intervening years. **Tax treatment of each element** The refund of premiums (and any associated loan interest) is not taxable, since it is simply putting you back in the position you should have been in -- it is not income. The statutory 8% interest, however, is treated by HMRC as savings interest income and is taxable in the tax year you received it. **Tax already deducted at source** Most PPI providers deducted basic rate tax (historically 20%) from the statutory interest element before paying it out, similar to how banks used to deduct tax from savings interest before April 2016. **Reclaiming overpaid tax** Because the Personal Savings Allowance (which lets basic rate taxpayers earn up to £1,000 of savings interest tax-free, and higher rate taxpayers up to £500) did not exist before April 2016, and many people's total savings interest (including the PPI statutory interest) falls within their allowance in the year it was paid, a large number of people who received PPI payouts are entitled to reclaim some or all of the tax deducted from the interest element. **How to reclaim** You can reclaim overpaid tax on PPI interest from HMRC using form R40 (or via your Self Assessment return if you complete one), provided you are within the relevant time limit (generally four years from the end of the tax year in which the interest was received). **Worked example** Someone receives a £5,000 PPI refund plus £1,200 of statutory interest, with £240 (20%) tax already deducted. If their total savings interest for the year, including this £1,200, falls within their Personal Savings Allowance, they can reclaim the full £240 from HMRC. **Practical tip** Check your PPI payout letter for the breakdown between refund and statutory interest, and use HMRC's R40 process if you believe you are due a refund of the tax deducted -- many people never claim it back simply because they were unaware it was reclaimable.

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