PPI Tax Allowance

If tax is due on PPI payouts, most firms deduct it automatically, at the basic 20% rate before you receive the money. But since the 6th April 2016, more people have been owed tax back, due to the launch of the personal savings allowance. This allows most taxpayers to earn up to £1,000 a year of savings interest tax-free.

Why tax is taken off PPI payouts

The money you get paid back for PPI can have up to three main elements...

A refund of the PPI you paid.

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.

You get statutory interest (at 8% 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 liable to be taxed. This is usually shown on your payout statement. (In the rare event it wasn't shown, if you were paid statutory interest, you can request a certificate from the firm that paid you back your PPI showing the tax deducted.)

The reason tax is due is because this statutory interest is paid to try to return you to the position you would have been in if you hadn't been mis-sold PPI. Therefore – oversimplifying somewhat – it counts as savings interest as if you'd earned it on your saved cash.

This applies even if the PPI payout was used to pay off existing debts with the lender, or went towards a claims firm's costs, as you are still benefiting in the same way.

Why you may be owed tax back on PPI payouts' interest

If tax is due on PPI payouts, most firms always have, and still do, deduct it automatically, at the basic 20% rate before you get the money. This has always been an obvious issue for non-taxpayers.

However, since 6 April 2016, far more people have been owed tax back as that's when the personal Savings Allowance launched. It allows most taxpayers to earn up to £1,000 a year of savings interest tax-free.

Since then, while most savings interest has been paid 'gross', ie, without any tax being taken off, PPI still has 20% automatically deducted.

And as PPI is taxed as a lump sum payment at the point it is paid, most people who have paid tax on PPI payouts since then are entitled to some money back.