Interest On Your Refund: The 8% Rate And What Replaced It
When an unaffordable lending complaint is upheld, the lender refunds the interest and charges you paid. On top of that refund, interest is added to compensate you for not having had the use of that money in the years since.
For nearly 25 years that interest was a flat 8% a year. It is not any more. On 1 January 2026 the Financial Ombudsman Service replaced it with a rate that tracks the Bank of England base rate plus one percentage point. A great deal of published guidance still says 8%, which is why this page exists.
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Which rate applies to you
This is the only question that matters, and it turns on when your complaint was referred to the Ombudsman, not when it is decided.
- Referred on or after 1 January 2026 — Bank of England base rate plus one percentage point. Base rate has been 3.75% since 30 July 2026, so the current figure is 4.75%.
- Referred up to and including 31 December 2025 — the old 8% rate still applies, even if the complaint is decided later.
- Where a firm pays an award late — the Ombudsman can still order 8% as a penalty for the delay. That is separate from the rate on the award itself.
If you are starting a complaint now, the first of those is yours.
Where the 8% came from, and why it went
The 8% figure was the long-standing rate of statutory interest on judgment debts, set under Section 17 of the Judgments Act 1838. The Ombudsman adopted it for financial services redress and applied it consistently for decades. Because it was fixed, it did not move with the economy.
That became the problem. Eight per cent made sense when savings rates were close to it. Through the years when base rate sat at 0.1%, it did not — a redress award was paying far more than the money could have earned anywhere. After consulting through 2025, the Ombudsman changed the default so it tracks actual conditions.
How the new rate is worked out
Two things are different from the old flat calculation.
It is a weighted average, not a spot rate. The interest is calculated across the whole period from when you lost the money to when redress is paid, using the base rate as it actually stood over that time. Because base rate moved a great deal between 2020 and 2026, the effective rate on older money is not simply today's 4.75%.
It is still simple interest, not compound. As before, it applies to each refunded amount individually, running from the date you paid it to the date of settlement, and it does not accrue on previously-accrued interest.
The Ombudsman has published an interest calculator that applies the new rate properly. It is aimed at firms, but anyone can use it.
A worked example
Take a single £100 charge paid on 1 January 2020, with redress settled six years later.
- Under the old 8% rule: £100 × 8% × 6 years = £48 of interest, for a combined £148.
- Under the new rule, the calculation uses base rate plus 1% as it stood across those six years. At today's 4.75% the equivalent would be about £28.50, but the true figure depends on the weighted average over the period rather than the current rate.
Repeat that across every charge in the unaffordable lending period. The interest element is still meaningful on older lending — it is simply smaller than the 8% era figure, and it is no longer a number you can work out on the back of an envelope.
Tax on the interest element
This part has not changed. The interest is treated as savings income. The lender deducts basic-rate income tax (currently 20%) from the interest element at source and pays it to HMRC. The deduction is shown on the redress statement.
What it means for you depends on your position:
- Basic-rate taxpayer — the 20% deduction settles your liability on the interest. Nothing further to do.
- Higher-rate or additional-rate taxpayer — you have more to pay. Report it on your self-assessment return.
- Non-taxpayer, or within your Personal Savings Allowance — you can reclaim some or all of the deducted tax from HMRC.
Crucially, the 20% comes off the interest only, never the underlying refund. The refund itself is not taxable income, because it is the return of money you already paid.
How it appears on the redress statement
A typical statement breaks down like this:
- Refund of interest and charges: £X.
- Ombudsman interest: £Y (gross).
- Less 20% basic-rate tax on the interest element: −£Y × 0.20.
- Net interest paid: £Y × 0.80.
- Total cash payment: £X + (£Y × 0.80).
The statement should also show the calculation period and the rate applied. If the figures do not make sense, ask the lender for a full breakdown — they must be able to explain how they got there. It is worth checking which rate they have used, because guidance across the industry has been slow to catch up with the January change.
Reclaiming overpaid tax
If you are a non-taxpayer, or your total savings income for the year sits within your Personal Savings Allowance (£1,000 for basic-rate taxpayers, £500 for higher-rate), you can reclaim the 20% that was deducted:
- 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 you received the interest.
- Provide the redress statement showing the gross interest and the tax deducted.
If you file a self-assessment return, it goes through the return instead.
Where different rules apply
The Ombudsman's default rate is not universal:
- Court-ordered redress under Section 140A of the Consumer Credit Act follows the court's own discretion on interest.
- Scheme of Arrangement payouts — Provident, Amigo, Morses Club and similar — are governed by the scheme terms, not the Ombudsman's rate. Distributions have typically been a small fraction of the underlying entitlement.
- Settlement offers that go beyond redress may structure any additional element differently.
