Martin Lewis, the MoneySavingExpert, has shared an important update for those who had a PPI payout.
The TV money and finance guru informed viewers on his self-titled ITV show on Thursday night (October 29) about reclaiming tax on PPI payouts.
What did Martin say?
Speaking directly to viewers on his show, Martin said: "Mis-sold PPI payouts include eight per cent statutory interest.
"This counts as savings interest for tax purposes. Unlike savings, 20 per cent tax automatically taken off.
"Since April 2016, most can earn £1,000 a year interest untaxed."
Why is tax taken off PPI payouts?
According to further advice on Martin's MoneySavingExpert website: "The money you get paid back for PPI can have up to three main elements.
"A refund of the PPI you paid.
"If the bank (outrageously) added an extra loan to your original loan just to pay for the PPI, you get back any interest you were charged on this extra loan.
"You get statutory interest (at 8% a year, but not compounded) on the total of both those sums, for each year since you got the PPI.
"Of these, only the third element is liable to be taxed. This is usually shown on your payout statement. (In the rare event it wasn't shown, if you were paid statutory interest, you can request a certificate from the firm that paid you back your PPI showing the tax deducted.)
"The reason tax is due is because this statutory interest is paid to try to return you to the position you would have been in if you hadn't been mis-sold PPI. Therefore – oversimplifying somewhat – it counts as savings interest as if you'd earned it on your saved cash.
"This applies even if the PPI payout was used to pay off existing debts with the lender, or went towards a claims firm's costs, as you are still benefiting in the same way."
How far back can tax be reclaimed?
The website continued: "Unfortunately you can't reclaim tax on payouts received before April 6, 2016.
"You can only reclaim PPI tax going back four tax years, as well as the current one. So as the 2020/21 tax year has kicked in, that means the furthest you can go back is the 2016/17 tax year.
"Therefore, tax reclaims can't be made on any PPI payouts received on or before 5 April 2016."
How can tax be reclaimed on PPI payments after April 2016?
Martin added: "The payments counts in the tax year it is paid out.
"Fill out the R40 form on gov.uk, it can be tricky but there's help online."