If you file a Self Assessment tax return, you don’t reclaim tax on car finance compensation with form R40. GOV.UK says R40 claims are for people who aren’t in Self Assessment (GOV.UK). Instead, the interest added to your compensation and the tax the lender deducted from it go on your tax return for the year you were paid. The return then works out what you actually owed, and any overpayment reduces your bill or is repaid.
Who this applies to
You’re likely to be in Self Assessment if, for example, you’re self-employed, a partner in a business, a landlord, or you have other income HMRC has asked you to report. If you’re not sure, check whether HMRC has sent you a notice to file a return or given you a Unique Taxpayer Reference for Self Assessment.
If you’re not in Self Assessment, our guide to form R40 explains how the claim works instead.
What goes on the return
Only the interest part of the compensation is income. The refund of what you overpaid isn’t (HMRC SAIM2115). So on the return you include:
- the interest added to your compensation, in the UK interest section;
- the income tax the lender deducted from that interest.
Use the tax year you were paid, which runs from 6 April to 5 April. The figures come from your lender’s letter or tax deduction certificate. Our guide on how to read your car finance compensation letter shows where to find them.
What the Financial Ombudsman says
The Financial Ombudsman Service explains how compensation interest is treated for different taxpayers (Financial Ombudsman):
- If you don’t earn enough to pay income tax, you can usually claim back the tax the business deducted.
- If you pay basic-rate tax, the business has already deducted the right amount of tax, but you’ll usually need to mention the compensation and the tax deducted on a Self Assessment return.
- If you pay higher-rate tax, you need to tell HMRC about the compensation so it can be taxed correctly.
How the allowances are applied
Your tax return applies your Personal Savings Allowance and, if your other income is low enough, the starting rate for savings (GOV.UK). If the compensation interest falls within those allowances, the tax the lender deducted counts towards your bill as tax already paid. That can reduce what you owe for the year or lead to a repayment.
From 6 April 2027, lenders will deduct 22% from interest, and the tax rates on savings income above your allowances rise to 22%, 42% and 47%. Our guide to which tax year your compensation counts in explains the change.
If you’ve already filed
If you were paid compensation in a tax year you’ve already filed a return for, and you didn’t include it, HMRC normally lets you amend a return up to 12 months after the 31 January filing deadline. It’s worth checking, because leaving out tax already deducted can mean you paid more than you needed to.
Getting help
If you file a return yourself, you can enter the figures directly. If you use an accountant, give them the lender’s letter and certificate. If you’re not in Self Assessment, our service submits an R40 for you; our how it works page explains the process, and the calculator gives a rough estimate of what you could get back.