Tax office using PPI as income

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Can someone please help . I recently was awarded a PPI payout around £6,500 and tried to reclaim the tax paid on the interest with the R40 form . The tax office wrote back saying I owe them Money as they are including the PPI payout as income for the year with my salary and it is now pushing me into the 40% tax bracket ! I have argued that it is only the interest I am taxed on but they say it still has to be included as income . 
Can anyone advise me .. Thankyou.
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  • [Deleted User]
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    Only the interest counts as income and that's what you pay tax on.  If it's pushed you into a higher tax bracket, then you will owe more tax.
  • SonOf
    SonOf Posts: 2,631 Forumite
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    Did you mention the capital element to them at all?  You shouldnt have but if you did then they may be misreading what you supplied them.  The capital element doesnt exist as far as HMRC are concerned. Just the interest.

    Interest is income and if you go into the higher rate band, then additional tax will be due.
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 13,675 Forumite
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    edited 25 February 2020 at 3:34PM
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    RichW52 said:
    Can someone please help . I recently was awarded a PPI payout around £6,500 and tried to reclaim the tax paid on the interest with the R40 form . The tax office wrote back saying I owe them Money as they are including the PPI payout as income for the year with my salary and it is now pushing me into the 40% tax bracket ! I have argued that it is only the interest I am taxed on but they say it still has to be included as income . 
    Can anyone advise me .. Thankyou.

    Not sure HMRC would even know about the PPI refund if you hadn't told them about it in the first place so I suspect they are simply taxing you on the income you declared on the R40 in the first place.

    PPI refunds aren't taxable and don't have tax deducted from them.

    The statutory interest/compensation paid alongside the PPI refund is taxable and does have tax deducted.

    Why not dig out your copy of the R40 and tell us what you declared and then it should be possible to see where you have gone wrong.
  • RichW52
    RichW52 Posts: 10 Forumite
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    Only the interest counts as income and that's what you pay tax on.  If it's pushed you into a higher tax bracket, then you will owe more tax.
    It’s pushing me into a higher tax with the full PPI claim it wouldn’t with just the interest alone .

  • RichW52
    RichW52 Posts: 10 Forumite
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    Thanks for your responses . We have raised a complaint but they are including it as savings income . I have been on the phone again today and we have an allocated person dealing with this but he won’t back down . Where else can I go with this ? 
    Really appreciate your responses it’s so frustrating!! 
    The way I see it they can only add the £1216 in income tax to the yearly income not the £6000 . 
  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 13,675 Forumite
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    edited 25 February 2020 at 7:39PM
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    RichW52 said:
    Thanks for your responses . We have raised a complaint but they are including it as savings income . I have been on the phone again today and we have an allocated person dealing with this but he won’t back down . Where else can I go with this ? 
    Really appreciate your responses it’s so frustrating!! 
    The way I see it they can only add the £1216 in income tax to the yearly income not the £6000 . 

    That is very confusing.  You cannot just add in tax, you have to include the interest as well.  I'm not quite as convinced that there is anything wrong now.

    Tax is all about the detail so it would help us to help you resolve this if you provided some proper info.

    How much was the taxed interest?

    How much tax was deducted?

    What did you enter on the R40?

    Have you received a calculation letter, maybe a P800?  If so what did that show for the interest income and tax deduction.

  • RichW52
    RichW52 Posts: 10 Forumite
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    So the gross interest was £6,082 and the tax paid on that was £1,216 , the net interest was £4,865.84 this is the info it was asking on the R40 which I submitted  . When the tax office wrote back saying I owe over £600 now it states “ savings income “ £6043 “ .... They are adamant that the £6043 is considered savings to . 

  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 13,675 Forumite
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    edited 25 February 2020 at 8:10PM
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    I don't understand why the calculation(?) would show less than £6,082 but I now think you have maybe misunderstood how tax on savings interest works.

    You have £6,043 interest which needs to be taxed.  From what you've posted worse case scenario would be,
    £500 x 0% = £0.00
    £5,543 x 40% = £2,217.20
    Total tax due = £2,217.20
    Tax deducted by the PPI company £1,208.60*
    Tax owed by you £1008.60
    *assuming the tax is 20% of the interest in the HMRC calculation

    Presumably you had some basic rate tax band unused so the tax owed is a bit less.

    What were you expecting to happen?
  • BoGoF
    BoGoF Posts: 7,099 Forumite
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    RichW52 said:
    So the gross interest was £6,082 and the tax paid on that was £1,216 , the net interest was £4,865.84 this is the info it was asking on the R40 which I submitted  . When the tax office wrote back saying I owe over £600 now it states “ savings income “ £6043 “ .... They are adamant that the £6043 is considered savings to . 

    That's because it is.
  • RichW52
    RichW52 Posts: 10 Forumite
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    So why is correct ...that with that and my salary I am pushed into 40% tax band for the year ?? 
    I thought the point of PPI payouts were supposed to be that the compensation is supposed to not put you in a less favourable position.  
    I have already paid interest on the PPI so why would I be penalised further ? 

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