PPI and Tax

Ajd38

Looking to enlighten myself a bit.... 

I submitted a R40 form in March to claim back tax paid on a PPI rebate for FY 2021/21 - specifically the element 

Deduction from statutory compensation for income tax at 20% 

As I was under the impression I had a personal savings allowance of £1000 before I had to pay tax on it (and I hadn't used any of that). 

However, this then gets turned around and I get told I actually owe HMRC a sizeable amount. The explanation being that the total refunds due (pre tax) pushes me into the higher rate taxpayer bracket as it is classed as income and therefore my entire tax bill for 20/21 has to be recalculated.

So I guess my first question is PPI rebates (the entire component or individual elements) classed as income and therefore I should have been aware it would have pushed my into a higher rate tax bracket?

Thanks! 

dunstonh

As I was under the impression I had a personal savings allowance of £1000 before I had to pay tax on it (and I hadn't used any of that).

Correct if you are a basic rate taxpayer or lower.  If you are higher rate then its £500.   

So I guess my first question is PPI rebates (the entire component or individual elements) classed as income and therefore I should have been aware it would have pushed my into a higher rate tax bracket?

The refund of premiums is not taxable.  That is just a refund.   Only the statutory interest paid is income.  You never tell HMRC about the premium refund.  Just the statutory interest and tax paid.

DullGreyGuy

Ajd38 said:

Looking to enlighten myself a bit.... 

I submitted a R40 form in March to claim back tax paid on a PPI rebate for FY 2021/21 - specifically the element 

Deduction from statutory compensation for income tax at 20% 

As I was under the impression I had a personal savings allowance of £1000 before I had to pay tax on it (and I hadn't used any of that). 

However, this then gets turned around and I get told I actually owe HMRC a sizeable amount. The explanation being that the total refunds due (pre tax) pushes me into the higher rate taxpayer bracket as it is classed as income and therefore my entire tax bill for 20/21 has to be recalculated.

So I guess my first question is PPI rebates (the entire component or individual elements) classed as income and therefore I should have been aware it would have pushed my into a higher rate tax bracket?

Thanks! 

Sounds like you filled in the forms incorrectly... there is no tax applied to the reward because its compensation. On top of the compensation is added statutory interest at 8% simple interest. It's the interest component that attracts tax in the same way as interest on your savings do but the savings themselves dont. 

Guessing you filled in the forms incorrectly and put the whole award in rather than just the interest component hence them saying your income is now in another band

Ajd38

Thanks for the responses! I suspect that's exactly what I've done (filling in the forms incorrectly). 

Guess I'm in for a treat trying to rectify!

Dazed_and_C0nfused

Ajd38 said:

Thanks for the responses! I suspect that's exactly what I've done (filling in the forms incorrectly). 

Guess I'm in for a treat trying to rectify!

An R40 is basically a simple tax return.  On which you declare all your taxable income.

If you have declared non taxable income on it then you will need to provide HMRC with clear details explaining what the correct taxable income is for that year

You must do this before 6April 2025 or you will be out of time to change anything for the 2020-21 tax year.