Tax rebates on car finance compensation

Why tax can come off car finance compensation

Car finance compensation has two parts. The main part puts right what you overpaid, and isn't taxed. On top of that, you get interest for the time you've been without your money. Under the FCA scheme that interest is worked out at the Bank of England base rate plus 1% a year, with a minimum of 3%.

HMRC treats that interest like savings interest. With PPI payouts, firms took basic-rate tax of 20% off the interest before paying it, and car finance lenders are expected to do the same. Your settlement letter should show the interest before tax, the tax taken off and what you were paid.

Who can claim tax back

Most people pay no tax on savings interest at all, because of these allowances:

• Personal Savings Allowance: £1,000 of interest a year tax-free for basic-rate taxpayers, £500 for higher-rate taxpayers and nothing for additional-rate taxpayers.
• Starting rate for savings: up to £5,000 of interest tax-free if your other income is under £17,570.
• Personal Allowance: if your wages or pension don't use all of your £12,570, the rest covers interest too.

So if you're a basic-rate taxpayer, or don't pay tax, and your total interest for the year (including your compensation interest) stays within your allowances, you can usually claim back all the tax taken off. Higher-rate taxpayers may get some back. Additional-rate taxpayers usually can't.

An example

Say your compensation includes £200 of interest. The lender takes off £40 tax (20%) and pays you £160 of it. If you're a basic-rate taxpayer with less than £1,000 of other savings interest that year, you can claim the £40 back.

For most people the refund will be tens of pounds per agreement rather than hundreds, but it's your money, and it adds up if you had several cars on finance.

When refunds are expected

Some lenders are already paying compensation on complaints. Most payments under the FCA scheme are expected in 2027, but parts of the scheme are on hold while legal challenges are heard. Where the scheme stands.

You claim tax back for the tax year you were paid in (6 April to 5 April). You can claim for the current tax year and the previous four, so there's no rush once you've been paid.

How to claim tax back yourself

• If you don't fill in a tax return: use HMRC's form R40, online or by post. You need one claim for each tax year.
• If you do fill in a tax return: include the interest and the tax taken off in your Self Assessment return.
• Keep your settlement letter. It shows the interest before tax and the tax taken off, which HMRC will ask for.

Claiming from HMRC is free.

Check if you can claim tax back

If you'd rather not deal with HMRC yourself, Tax Repayments (pcptaxrebates.co.uk) can check whether you're owed a refund and claim it for you. It takes a few minutes to check.

Check if you can claim tax back

Tax Repayments is an independent tax agent, not regulated by the FCA. Its fee is 39% plus VAT of the refund, plus a £35 plus VAT admin fee per claim, with a minimum fee of £84 including VAT. If your refund is £84 or less, it may keep all of it, so compare its fees with the refund you expect before signing up. See its fees.

HMRC hasn't published guidance specifically for car finance compensation yet. We'll update this page when it does.

First, get your compensation

There's no tax to claim back until compensation has been paid. If you had car finance between 2007 and 2024, check if you could be owed money.

Start your claim

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