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What is PPI tax?

In April 2016, the so-called personal savings allowance was also introduced, which means that basic taxpayers can receive an annual tax-free interest of £1,000 from their savings, including statutory interest on PPI expenditures.

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Most savings interest has been paid without any tax deduction,

but PPI is still automatically deducted by 20%.

Therefore, even if you do pay taxes and have received PPI payments in the past four years since the introduction of the personal savings allowance, you may still be owed.

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Why tax is deducted off PPI payouts

PPI claim usually consists of three main components. This includes the refund of the actual PPI, the additional loan interest that the bank may have added to your original loan to pay for the PPI, and the statutory interest of 8% per year on this amount.

Among them, only statutory interest is taxed, which will usually be shown on your payment statement. If not, you can request a certificate from the company to prove your PPI. Reason for taxing you is that statutory interest was paid to try to get you back to the state where you had not sold the PPI by mistake. This means it can be counted as savings interest, as if you were earning it with the saved cash.

Taxes you can recover

PPI expenditures should be taxed in the year of payment, not in the year when the PPI policy is implemented Therefore, if you were a non-taxpayer in the year you paid the PPI (currently meaning those with an annual income of less than £12,500, including any statutory interest), you can claim a refund of all taxes. But the amount of tax you can refund also depends on the year you received the payment. Please see below what applies to you.

The Personal Savings allowance came into effect on April 5, 2016. And this is a specific amount (in addition to the usual income tax relief) that you can earn tax free, albeit only on savings interest.

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For example, if you earn less than £ 50,000 a year, you can also earn £ 1,000 interest on your savings per year without paying tax.

Below you can find how much you can exempt from tax depending on how much you earn.

Basic rate of 20% of taxpayers (earning between £ 12,500 and £ 50,000) can earn £ 1,000 in interest per year excluding tax

Taxpayers with a higher 40% rate (earning between £ 50,000 and £ 150,000) can earn £ 500 in interest per year excluding tax

Taxpayers with the highest 45 percent interest rate (earning over £ 150,000) do not get relief on personal savings

If the total interest you have earned on your savings and the statutory PPI interest is lower than your personal savings relief, you are liable to refund all of your PPI.

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