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Could PPI create a tax problem?

One thing you might not have realised with PPI is that you may be due an additional tax repayment.  This is because each PPI settlement includes interest calculated at 8% on the refunded premiums and some banks have then deducted tax at 20% from the interest.

Since 6 April 2016 individuals paying tax at, or below, the basic rate (20%) are able to receive £1,000, £500 for higher rate taxpayers, of interest in a tax year before paying any tax on it.  This is known as the Personal Savings Allowance (PSA)

Therefore, if you have had tax deducted but have not received more than the PSA limit you could be due a repayment.

However, some lenders have not deducted any amount for tax.  Therefore, if you have received more than the PSA it may mean that you are due to pay a little bit of tax to HMRC.  Each year HMRC receives a bulk download of data from the banks relating to PPI payments, which it attempts to match to individual taxpayers.  However, the PPI data only includes a name and address, which could be years out of date, so the matching exercise is not perfect.

If you have received a letter from HMRC which mentions undeclared interest, this could relate to the PPI claim.  In that instance I would suggest checking whether you have declared the interest portion of your PPI settlement.

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