How to read your car finance compensation letter

When a lender pays car finance compensation, it sends a letter or statement showing how the payment was worked out. For a tax rebate, four figures matter: the interest added to your compensation, the income tax deducted from that interest, the amount paid to you and the date it was paid. If you can find those, you have what’s needed to work out whether HMRC owes you money.

Lenders lay their letters out in different ways, and scheme payouts are not expected until after the court hearing in February 2027 (FCA). So the wording on your letter may differ from the terms below. The figures to look for are the same.

The figures to look for

What to look for	Other names you may see	Why it matters
Redress or refund	Compensation, commission refund, loss, settlement	Money coming back to you. Not taxed as income.
Interest	Interest on redress, compensatory interest, 8% interest, simple interest	Taxed as savings income. This is what the rebate is based on.
Tax deducted	Income tax deducted, tax withheld, basic-rate tax	The tax the lender took off the interest. This is what can be reclaimed.
Amount paid	Net amount, total paid to you, payment made	What reached your bank account.
Payment date	Date paid, settlement date, date of payment	Decides the tax year, and so your allowances.

The refund and the interest are treated differently

Compensation usually has two parts. The refund puts back money you shouldn’t have paid, so it isn’t income. The interest makes up for the time you were without that money, and that part is taxed as savings income (HMRC SAIM2115).

So when you read the letter, separate the two. Only the interest line feeds into a tax rebate.

The tax deducted line

The law treats interest on compensation as yearly interest, and the payer has to deduct income tax from it before paying you (HMRC SAIM9115). The lender does this at the same rate for everyone, without knowing your income or allowances: 22% on payments from 6 April 2027, and 20% before that. Our guide to the Personal Savings Allowance explains why many people didn’t owe that tax.

A quick check: the tax deducted should be roughly 22% of the interest on a payment from 6 April 2027, or 20% on an earlier one. If it isn’t, or the letter shows no tax at all, ask the lender to explain.

The tax deduction certificate

The Financial Ombudsman Service says that when a business deducts tax from interest on compensation, it should pay the tax to HMRC and give you a tax deduction certificate. If you don’t receive one, you need to ask for it (Financial Ombudsman).

Some lenders put the tax details in the main letter. Others send a separate certificate or statement. Either way, a claim to HMRC needs three figures: the gross interest, the tax deducted and the net interest (GOV.UK). Our guide to the tax deduction certificate explains your right to one and how to ask.

The payment date

Interest is taxed in the tax year it’s paid to you. A tax year runs from 6 April to 5 April. The date on the letter, or the date the money reached your account, tells you which tax year to use. That matters because your allowances apply per tax year, and the tax rates on savings rise from 6 April 2027. Our guide to which tax year your compensation falls in explains this in detail.

An illustrative example

These figures are invented to show how the lines fit together. They aren’t from any real lender.

Line	Amount
Redress (refund)	£2,860.00
Interest on redress	£1,240.60
Gross compensation	£4,100.60
Income tax deducted (22%)	£272.93
Amount paid to you	£3,827.67

The interest is £1,240.60, so the tax deducted is 22% of that, £272.93. The refund of £2,860 isn’t taxed. A basic-rate taxpayer with no other savings interest that year has a £1,000 Personal Savings Allowance. No tax is due on the first £1,000 of interest, so £220 of the £272.93 is usually repayable.

If something is missing

• No interest shown. Some payouts don’t include interest, for example if an offer was made as a single settlement figure. Ask the lender whether any of the payment was interest.
• Interest shown but no tax. Ask the lender whether tax was deducted, and for a tax deduction certificate.
• No payment date. Use the date the money reached your bank account, and keep the bank statement.
• Lost letter. Ask the lender for a copy. A claim needs the figures, so it’s worth getting them in writing.

What to do next

Keep the letter and any certificate. You can use our car finance tax rebate calculator with the amount you were paid to get a rough idea of what you could get back. If you claim with us, we read the letter, work out the right tax year and allowances, and submit the claim to HMRC as your agent. Our fees are taken from the repayment. You can also claim from HMRC yourself.