Is Unaffordable Lending Redress Taxable?
The headline answer: the refund of interest and charges is not taxable, but the 8% statutory interest added on top is. The lender deducts basic-rate income tax (20%) from the 8% element at source and pays it to HMRC. What that means for you depends on your tax position. Higher-rate taxpayers may have further to pay; non-taxpayers may be able to reclaim the deduction. This page sets it out by income bracket.
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The two parts of redress, and why they are taxed differently
A typical successful claim produces redress in two parts:
- The refund of interest and charges — this is the return of money you previously paid to the lender. It is not income; it is a recovery of money that was yours. HMRC treats it as not taxable.
- The 8% statutory interest — this is interest paid on the refunded amount, compensating you for the delay in receiving the money back. HMRC treats it as savings income. It is taxable.
How tax is collected
The lender deducts basic-rate tax (currently 20%) from the 8% interest element at source, and pays the deduction to HMRC. The redress statement shows the gross 8% amount and the tax deducted. The net amount paid to you is the gross 8% minus the 20% deduction.
The tax is deducted from the 8% element only. The underlying refund of interest and charges is paid in full, with no deduction.
Your position by tax bracket
Non-taxpayer
If your total income for the tax year is below the personal allowance (currently £12,570), you do not owe any income tax. You can reclaim the 20% tax deducted from the 8% interest. The mechanism is HMRC form R40 (“Claim for repayment of tax deducted from savings and investments”), submitted by post or online. You have four years from the end of the tax year in which the interest was paid to reclaim.
Basic-rate taxpayer (taxable income up to £50,270)
Your tax position depends on whether the 8% interest fits within your Personal Savings Allowance (PSA), which is £1,000 for basic-rate taxpayers. Add the 8% interest to your other savings income (bank interest, etc.) for the tax year:
- If your total savings income is within the £1,000 PSA, you can reclaim the 20% deducted via form R40.
- If your total savings income exceeds the £1,000 PSA, the 20% deduction satisfies your liability on the 8% element.
Higher-rate taxpayer (taxable income £50,271 to £125,140)
Your PSA is £500. Your tax rate on savings income above the PSA is 40%. So:
- On the first £500 of savings income, including any 8% interest within that, you pay no tax — you can reclaim the 20% deducted on that portion.
- Above the £500 PSA, you owe 40% tax on the 8% interest. The 20% already deducted at source means you have a further 20% to pay through self-assessment.
Additional-rate taxpayer (taxable income above £125,140)
Additional-rate taxpayers do not have a Personal Savings Allowance. The 8% interest is taxable at 45%. The 20% already deducted at source means you have a further 25% to pay through self-assessment.
Where the 8% interest is reported
For most basic-rate taxpayers, no further action is needed — the deduction at source is the end of the matter. For others:
- Self-assessment taxpayers — report the gross 8% interest in the savings income section of your tax return. The system will calculate your liability and apply credit for the tax already deducted.
- Non-taxpayers and PSA reclaimants — submit form R40 to HMRC. You will need the redress statement showing the gross 8% interest and the tax deducted.
- Higher-rate without self-assessment — you may need to register for self-assessment for the year in which the interest was paid, particularly if your savings income above the PSA is significant.
Other tax-relevant points
A few wider considerations:
- Tax year of receipt — the 8% interest is treated as received in the tax year of payment (i.e. when the lender pays the redress), not the tax year of the original lending. A claim that takes years to resolve still produces interest taxable in the year of settlement.
- Means-tested benefits — a large redress payment may need to be declared to the DWP or local authority for benefits assessment purposes. Savings-based benefits (Pension Credit, Universal Credit capital limits) may be affected. Speak to a benefits adviser if relevant.
- Tax credits — savings income above £300 is reportable for tax credits purposes; the 8% interest counts.
Reclaiming overpaid tax — the practical steps
If you are entitled to reclaim some or all of the deducted tax:
- Wait until the end of the tax year in which the redress was paid (or until the redress statement arrives, if later).
- Complete HMRC form R40, available on gov.uk.
- Provide the redress statement showing the gross 8% interest and the tax deducted at source.
- Submit by post to the address on the form, or online via a Personal Tax Account.
- HMRC processes typically take 6-12 weeks for paper returns, faster online.
A note on tax advice
This page is general information, not tax advice. If your circumstances are complex — multiple sources of savings income, pension drawdown income, self-employment, IVA or bankruptcy — speak to a tax adviser or to HMRC directly. The free MoneyHelper service can also help with general guidance on tax on savings income.
Related guides
- The 8% statutory interest explained
- How redress is calculated
- What happens after you make a claim
- What if you still owe the lender money?
- Claiming in an IVA or after bankruptcy
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