The 8% Statutory Interest Explained
When an unaffordable lending complaint is upheld, the lender refunds the interest and charges you paid — but that is only part of the picture. On top of the refund, simple statutory interest at 8% per year is added, to compensate you for not having had the use of that money over the years since you paid it. This 8% element can add a meaningful amount to a refund, particularly for older lending. Here is how it works.
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Why 8%?
The 8% rate is the long-standing rate of statutory interest on judgment debts in the UK, set under Section 17 of the Judgments Act 1838 and the County Courts (Interest on Judgment Debts) Order 1991. The Financial Ombudsman has consistently applied 8% to redress for financial services complaints, and lenders settling cases without going to FOS follow the same approach. The rate is fixed; it does not vary with market interest rates.
How it is calculated
The 8% interest is calculated as simple interest, not compound. The mechanics:
- It is applied to each individual refunded amount (each interest payment, each fee, each charge).
- It runs from the date that amount was paid by the borrower to the date the redress is settled.
- It does not compound — interest is calculated only on the original refunded amount, not on previously-accrued interest.
- The total 8% interest across all refunded items is summed and added to the cash refund.
A worked example
Suppose a charge of £100 was paid on 1 January 2020, and the redress is being settled on 1 January 2026 — exactly six years later. The 8% calculation on that single charge:
- £100 × 8% × 6 years = £48 of statutory interest.
- Combined refund for that single item: £148.
Repeat this calculation for every individual charge across the unaffordable lending period, and the 8% element of a typical claim can be substantial. For a claim involving several years of credit card interest, the 8% interest can sometimes equal or exceed the underlying refund amount.
Tax on the 8% element
The 8% statutory interest is treated as savings income for tax purposes. The lender deducts basic-rate income tax (currently 20%) from the 8% element at source and pays it to HMRC. The tax is shown on the redress statement.
What this means for you depends on your tax position:
- Basic-rate taxpayer — the 20% deduction satisfies your tax liability on the 8% interest. No further action needed.
- Higher-rate or additional-rate taxpayer — you have further tax to pay on the 8% interest. Report it on your self-assessment return.
- Non-taxpayer or Personal Savings Allowance — you can reclaim some or all of the deducted tax from HMRC, depending on your overall savings income for the year.
Crucially, the 20% deduction is from the 8% interest only, not from the underlying refund of interest and charges. The refund itself is not taxable income — it is the return of money you paid.
How the 8% interest appears on the redress statement
A typical redress statement breaks the calculation down something like this:
- Refund of interest and charges: £X.
- 8% statutory interest: £Y (gross).
- Less: 20% basic-rate tax on the 8% element: -£Y × 0.20.
- Net 8% interest paid: £Y × 0.80.
- Total cash payment: £X + (£Y × 0.80).
The statement should also show the calculation period and the rate applied (8% simple). If the figures on your statement don’t make sense, ask the lender for a detailed breakdown — they are required to be able to explain the calculation.
Reclaiming overpaid tax
If you are a non-taxpayer or your total savings income for the year is within your Personal Savings Allowance (currently £1,000 for basic-rate, £500 for higher-rate), you can reclaim the 20% tax that was deducted. The mechanism:
- Use HMRC form R40 (Claim for repayment of tax deducted from savings and investments).
- Submit within four years of the end of the tax year in which the interest was received.
- Provide the redress statement showing the 8% gross amount and the tax deducted.
For self-assessment taxpayers, the reclaim happens through the normal annual return.
When 8% might not apply
8% is the standard rate FOS applies to unaffordable lending redress, but a few situations are different:
- Court-ordered redress under Section 140A of the Consumer Credit Act follows the court’s discretion on interest, often the same 8% but can vary.
- Scheme of Arrangement payouts (Provident, Amigo, Morses Club legacy) are governed by the scheme terms, not the standard 8% — typical scheme distributions have been a small fraction of the underlying entitlement.
- Settlement offers from a lender that go beyond redress and include additional consideration may structure the additional element differently, although the 8% on the refund part should be 8%.
Related guides
- How redress is calculated
- Is unaffordable lending redress taxable?
- What if you still owe the lender money?
- What happens after you make a claim
- Will a claim repair my credit file?
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