Thousands of people have claimed and received refunds of payment protection insurance (PPI). Most people believe that the entire payment is tax free and hence does not have to be declared on their tax return. This is not the case. Some banks deduct 20% tax from the interest paid, but other lenders do not.
Each PPI settlement includes interest calculated at eight percent on the refunded premiums and that interest is taxable.
PPI interest must be declared
In all cases the interest portion of the PPI settlement must be declared on your tax return for the year in which it was received. There may be additional tax to pay on this interest depending on when you received it and the level of other interest received in the same year.
HMRC receives a bulk download of data from the banks relating to PPI payments, which it tries to match to individual taxpayers. But this matching is tricky as the PPI data only includes a name and address which could be years out of date. If you receive a letter from HMRC which mentions undeclared interest, this could relate to the PPI claim you have forgotten you made. Check whether you declared the interest portion of your PPI settlement on your tax return.
You can amend your tax return
If you did not declare the interest you can amend your 2016-17 tax return online until 31 January 2019. If you need to correct an earlier year you should notify HMRC by letter, or we can do this for you.
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This note was published from our Winter 2018 Tax Briefing dated December 2018
Please be aware that the information above may have changed in subsequent months.
This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.