Yes. If you don’t pay income tax, you can usually reclaim all of the tax the lender deducted from the interest in your car finance compensation. Lenders take 20% from the interest whatever your circumstances, so non-taxpayers are among the people most likely to be owed money back.
Why tax was taken if you don’t pay tax
Car finance compensation often includes interest, to make up for the time you were without your money. That interest counts as savings income. Our overview of whether car finance compensation is taxable explains the rules in full.
The lender usually deducts basic-rate tax (20%) from it before paying you. The lender doesn’t know your tax position, so it deducts the same amount from everyone. HMRC then repays anyone who didn’t owe it, once they claim.
Who counts as a non-taxpayer
For this purpose, you’re a non-taxpayer if your total income for the tax year, including the compensation interest, is below the Personal Allowance. That is £12,570 for most people.
This often includes:
- people who are retired and living mainly on the State Pension
- students and people not working
- people working part-time on low pay
- carers and people whose main income is from tax-free benefits
If that’s you, no tax was due on the interest, and the general rule is that you get back all the tax deducted.
Three allowances that can protect your interest
Even if your income is a little above the Personal Allowance, you may still owe nothing on the interest. GOV.UK describes three allowances that work together.
Personal Allowance. The first £12,570 of your income is tax-free for most people. Any of it you haven’t used on wages or pension can cover savings interest.
Starting rate for savings. If your other taxable income (not counting savings interest or dividends) is less than £17,570, you can get up to £5,000 of interest tax-free. Every £1 of other income above your Personal Allowance reduces this by £1.
Personal Savings Allowance. On top of that, basic-rate taxpayers get £1,000 of interest tax-free.
A worked example
Pat is retired with pension income of £14,000 a year. Pat receives car finance compensation that includes £1,500 of interest, and the lender deducts £300 in tax.
Pat’s pension is £1,430 above the Personal Allowance. That reduces the £5,000 starting rate for savings to £3,570. The £1,500 of interest fits inside it, so no tax was due. Pat can claim the full £300 back.
Pat is technically a taxpayer, because of the pension. But the interest itself was tax-free, so the outcome is the same as for a non-taxpayer. Our calculator uses simpler general rules, so people with income just above the Personal Allowance may find the real repayment is higher than the estimate.
Scottish taxpayers
If you live in Scotland, savings income uses the UK rates and allowances, not the Scottish income tax bands. The same rules above apply to you.
Getting the tax back
GOV.UK says tax on savings interest can be reclaimed if your income was below your Personal Allowance, within four years of the end of the tax year. Most people do this with an R40. If you’re registered for Self Assessment, it goes through your tax return instead.
The key document is the letter from your lender showing the gross interest, the tax deducted and the net amount. If you had more than one payout in the same tax year, they go on one claim. See our guide to multiple payouts.
When you use our service, we check your income for the year, confirm which tax year each payout falls in, prepare and submit the R40 as your agent, and deal with any HMRC queries. Once HMRC repays, we pay you the balance after our fees. Our how it works page explains the process.
Next step
Check the figures on your lender’s letter, then use our eligibility calculator for a quick estimate. Individual circumstances vary, so treat it as a guide rather than a final figure.