MILLIONS of Brits who were mis-sold payment protection insurance (PPI) could be owed £350million in tax.
This is because most banks and lenders that sold PPI automatically deduct tax from payouts, even though not everyone has to pay it.
Roughly £40billion has so far been paid out in compensation to more than 12million customers who took out PPI, reports The Sunday Times.
When the payouts were made, banks refunded the actual PPI premium plus 8 per cent in interest a year.
But many firms deducted tax from PPI payouts at the basic 20 per cent rate, meaning non-taxpayers are due the money back.
In April 2016, the so-called personal savings allowance was also rolled out, meaning basic rate taxpayers can earn £1,000 a year tax-free interest on their savings (or £500 for higher-rate payers).
What is payment protection insurance (PPI)?
HERE’S all you need to know about the mis-selling scandal.
PPI was an insurance policy attached to credit agreements such as loans, mortgages or credit cards.
The idea of these policies was to cover payments when a policyholder fell ill, had an accident or lost their job.
Sales of these policies were popular from the nineties and into the new millennium.
But then consumer groups started raising questions and a series of investigations revealed that lots of people had been sold policies when they shouldn’t have been.
One problem was that sales staff were incentivised to sell PPI at all costs, meaning lots of people ended up being mis-sold to.
Some consumers had policies sold in the small print that they weren’t aware of, others were sold insurance they would never be able to claim (for instance because they were self-employed or retired).
Sales of single-premium PPI policies were banned in 2009 and despite initial opposition, lenders were ordered to consider all PPI complaints in 2011.
So even if you do pay tax and you’ve received your PPI payout after the personal savings allowance was introduced, you could also be owed money.
Since the savings allowance was introduced, £13billion has been paid out in compensation, of which £1.75billion is thought to be interest.
Based on these figures, savers could be owed a collective £350million in tax, the Sunday Times has estimated.
The news comes as Martin Lewis last year urged PPI victims to claim back tax as it could boost your bank balance by hundreds of pounds.
The tax you can reclaim on payouts
The PPI payout is taxed in the year it is paid, and not in the year the PPI policy was taken out.
So if you were a non-taxpayer in the year the PPI was paid out (currently that means those earning less than £12,500 including any statutory interest), you can claim all the tax back.
But the amount of tax you can get refunded, also depends on the year you received the payout. Check below to see what applies to you.
PPI payouts after April 6, 2016:
The personal savings allowance came into force on April 5 in 2016, and it’s a specific amount (on top of the usual income tax personal allowance), that you are allowed to earn tax-free, although only on savings interest.
For example, if you rake in less than £50,000 per year, you’re allowed to earn £1,000 in interest on your savings per year without having to pay tax on this.
Below’s how much you can get tax-free depending on how much you earn.
- Basic 20 per cent rate taxpayers (earning £12,500 to £50,000) can earn £1,000 interest a year tax-free
- Higher 40 per cent rate taxpayers (earning between £50,000 and £150,000) can earn £500 interest a year tax-free
- Top 45 per cent rate taxpayers (earning over £150,000) don’t get a personal savings allowance
If the total interest you’ve earned from your savings and the PPI statutory interest is less than your personal savings allowance, you are due all PPI tax paid back.
Or if the combined total pushed you over a tax threshold, you should only pay tax on the amount above it.
As an example, a basic rate taxpayer who last year earned £300 in interest on their savings and got a PPI payout including £750 of statutory interest, would have earned a total of £1,050 in interest – £50 above their personal savings allowance.
Therefore, they should only pay 20 per cent tax on the £50 over their personal savings allowance (ie, £10 tax) and the rest is tax-free.
As the PPI automatically had £150 tax taken off it, the taxpayer is due £140 back.
PPI payouts before April 5, 2016:
Sadly, if you received your payout before the personal savings allowance came into effect, you won’t get the additional tax-free allowance.
If you’re a basic rate taxpayer, and you’ve had 20 per cent automatically deducted, there’s nothing to claim back.
Or if you were a higher-rate taxpayer, then you should’ve been paying 40 per cent tax.
Yet non-taxpayers should be able to reclaim some or all of the tax on their PPI payout just like other savings income.
How to claim back tax
If you believe you are owed tax back and haven’t reclaimed it yet, you should use the R40 form, available on the GOV.UK website.
You can make a claim using the online service, or fill in the form on-screen, print it off and post it to HMRC.
To use the online service, you need a Government Gateway user ID and password. If you don’t have a user ID, you can create one when you use the service.
If you use the online form, you’ll get a reference number you can use to track the progress of your claim.
Should you need help, you can call the income tax helpline on 0300 200 3300.
The deadline to claim compensation for mis-sold PPI closed at the end of August last year.
But victims who’ve submitted claims may not get a response until this summer due to a deluge of last-minute complaints.
Nationwide has also been ordered to pay £2million back to thousands of customers over not sending PPI reminders.