Last updated: 14 October 2026
How do you deal with tax deducted from interest?
Since 6 April 2016, banks and building societies pay interest gross, without tax taken off. Tax is still deducted at 20% from some types of interest, such as statutory interest on PPI and other compensation, interest from UK companies on loans or corporate bonds paid to individuals, and the income element of purchased life annuities. If you’re not liable for that much tax, you can claim it back using form R40, through Self Assessment, or by phone for PPI interest. If you’re a higher rate taxpayer, you report it and pay the extra.
Where tax is still deducted
| Type of interest | Tax deducted? |
| Bank and building society interest | No |
| NS&I products | No |
| Statutory interest on PPI refunds | Yes, 20% |
| Interest on loans to a UK company (e.g. director’s loan to own company) | Yes, 20%; company reports on CT61 |
| Interest from peer-to-peer platforms | No |
| Purchased life annuity income element | Yes, 20% |
| Gilt and corporate bond interest | Usually paid gross |
Claiming it back
- Self Assessment: enter the gross interest and tax taken off; any overpayment is refunded
- Form R40: if you don’t file a return, claim for each year, up to 4 years back
- Personal tax account or phone: HMRC may accept simple PPI claims this way
Example
Margaret, a pensioner with £14,000 income, receives a PPI refund in 2026 with £3,000 of statutory interest, from which the bank deducted £600. Her non-savings income exceeds the Personal Allowance by £1,430, which leaves £3,570 of the £5,000 starting rate for savings, plus her £1,000 Personal Savings Allowance. The full £3,000 is covered, so she can reclaim all £600 using form R40.
Director’s loans to your company
If you lend money to your company and it pays you interest, the company deducts 20% and pays it to HMRC quarterly using form CT61. You report the gross interest on your tax return and get credit for the tax deducted. The company gets a deduction for the interest paid.
Higher rate taxpayers
If you’re a higher rate taxpayer, savings over the £500 allowance are taxed at 40%. The 20% already deducted is credited, and you pay the remaining 20% through Self Assessment or your tax code.
Common mistakes
- Not claiming back tax on PPI interest
- Reporting the net figure instead of the gross amount
- Companies forgetting to file CT61 returns on director loan interest
- Missing the 4-year time limit
Records to keep
Keep certificates of tax deducted, which the payer must provide on request, and statements showing gross interest.
Non-taxpayers
If your total income is below your Personal Allowance, you can reclaim all tax deducted from interest. Non-taxpayers who regularly receive interest with tax deducted, such as from a purchased life annuity, may be able to arrange for it to be paid gross by giving the provider the correct form.
Frequently asked questions
Why was tax deducted from my PPI payout?
Statutory interest is still paid net by law.
Can I reclaim tax on interest in a joint account?
Yes, your share.
Does deducted tax count for payments on account?
Yes, it’s tax deducted at source.
How long does an R40 take?
Usually around 8 weeks.
Related: bank compensation, interest from a closed account and payments on account.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with tax refunds on savings. See our tax refund accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
