PPI effects tax credits HELP!!!!

burgensteen

Hi.
My wife got a PPI claim refund of approx £4500 last year. We declared it to the tax office over the phone immediately and inquired about how it may effect our tax credits (only one person working as we have young child). They said don't worry about it.
We have just received a letter from the tax office stating we owe £1700 approx back from last year (we only got £2000 approx in the first place) and that it will all be deducted this year. Leaving us with approx £7 a week tax credits.

Is this correct as I thought it was just the interest they took in to account as they are only returning money that is ours in the first place and has already had income tax paid on it.

Any help much appreciated.

DrSqueeze

Have they given you a breakdown of their figures and how much they calculate your income to have been for the last tax year?

If not, phone them and check what they've based their sums on.

It could simply be an error*, or it could be that your other income varied from the original estimate as well.

Best to check first. Then if you think they are incorrect you can appeal against their decision.

* [ I've seen tax miscalculations where HMRC added "refunded interest charges" and "interest added" together, so nobody is immune from making mistakes ]

dunstonh

The interest element of the refund is effectively added to income for tax purposes. So, for means tested benefits, it can potentially reduce them. However, it is only on the interest element. Not the capital part.

burgensteen

Thanks for the fast response.
The breakdown shows the full £4500 as income added to my wife's work income for last year.

We have rung up once and explained and they said they would re-calculate but they have sent a breakdown stating the same amounts.

I don't believe that the full amount should be classed as income as they are only returning money that they illegally took in the first place (hence the refund) which has already had income tax paid on it.

The £4500 didn't have tax taken off when paid to us so I understand the need to take the interest into account but not the money owed.

sun73

It appears the tax office has treated your ppi refund as earned income in the previous tax year following a report in change of circumstances to your joint household income which seemed the honest thing to do at the time.


However, I'm pretty sure this is an error on their part. The compensation element should be treated as savings and £4500 is well below the cut off for means tested benefits, it's only the added interest that may impact on your tax credit award.

dunstonh

I don't believe that the full amount should be classed as income as they are only returning money that they illegally took in the first place (hence the refund) which has already had income tax paid on it.

It wasnt illegally taken and you are getting back more than you paid in the form of interest. UK law requires interest to be taxed. The capital element of the refund (i.e. the premiums being refunded) is not interest and is not taxed and has no impact on any means tested benefits.

A £4500 refund is unlikely to be mostly made up of interest. So, this does seem like an error.