Thousands of people have claimed and received refunds of payment protection insurance (PPI). Most people believe that the entire payment is tax free and hence does not have to be declared on their tax return. This is not the case. Each PPI settlement includes interest calculated at eight percent on the refunded premiums and that interest is taxable. Some banks deduct 20% tax from the interest paid, but other lenders do not.
In all cases the interest portion of the PPI settlement must be declared on your tax return for the year in which it was received. There may be additional tax to pay on this interest depending on when you received it and the level of other interest received in the same year
HMRC receives a bulk download of data from the banks relating to PPI payments, which it tries to match to individual taxpayers. But this matching is tricky as the PPI data only includes a name and address which could be years out of date. If you receive a letter from HMRC which mentions undeclared interest, this could relate to the PPI claim you have forgotten you made. Check whether you declared the interest portion of your PPI settlement on your tax return. If you did not declare the interest you can amend your 2016-17 tax return online until 31 January 2019. If you need to correct an earlier year you should notify HMRC by letter, or we can do this for you.