The R40 is HMRC’s form for claiming back income tax that was deducted from your savings and investment income. It matters for car finance compensation because the interest part of a payout is treated as savings income, and the lender usually deducts 20% income tax from that interest before paying you. If you didn’t owe that tax, an R40 claim is how it comes back to you.
Why tax is taken from your compensation
Car finance compensation is often made up of two parts. One part puts right the money you lost. The other is interest, added to reflect the time you were without that money.
The interest is taxable as savings income. Lenders usually deduct basic-rate tax (20%) from it at source. They do this for everyone, whatever your own tax position. That is why many people end up having paid tax they didn’t owe.
Most people have a tax-free Personal Savings Allowance: £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and nothing for additional-rate taxpayers. Some people on low incomes can also use the starting rate for savings, worth up to £5,000 of interest. If the interest fits within your allowances, some or all of the tax deducted can be repaid.
Who the R40 is for
According to GOV.UK, the R40 is for people whose gross income from savings and investments is £10,000 or less, and whose income from land and property is within HMRC’s limits.
It is not used by people registered for Self Assessment. In that case the interest and the tax deducted go on the tax return, and any overpayment is dealt with there.
The R40 is commonly used by:
- people who earn less than the Personal Allowance, such as many retirees, students and carers
- basic-rate taxpayers whose interest falls within their £1,000 allowance
- some higher-rate taxpayers, depending on how much interest they received
What’s involved in a claim
A claim is more than the compensation letter. HMRC looks at your whole income for the tax year in question.
The right tax year. A UK tax year runs from 6 April to 5 April. What matters is the date the compensation was paid, not when you took out the finance. If you had more than one payout, they may fall in different years, and each year is a separate claim.
Evidence from the lender. GOV.UK says a claim on interest needs evidence from the company that paid it, showing the gross interest, the tax deducted and the net interest. A lender’s settlement letter or tax statement usually shows all three. Our hire purchase guide explains how to spot these figures.
Your other income. Wages, pensions, taxable benefits and other savings interest for the same year all affect how much of the tax can be repaid.
The time limit. Claims can be made up to four years after the end of the tax year the interest was paid. Compensation paid in the 2026 to 2027 tax year, for example, can be claimed until 5 April 2031.
A worked example
Sam is a basic-rate taxpayer with a small amount of bank interest each year, well under £1,000. In the 2026 to 2027 tax year Sam receives car finance compensation that includes £600 of interest. The lender deducts 20%, which is £120, and pays Sam £480.
Sam’s total savings interest for the year, including the £600, stays within the £1,000 Personal Savings Allowance. So no tax was due on it, and the full £120 is repayable.
If Sam had been a higher-rate taxpayer, the allowance would be £500. Then £500 of the interest would be tax-free and the remaining £100 taxed at 40%, which is £40. Sam would have paid £120 and owed £40, so £80 would be repayable. See our guide for higher-rate taxpayers. If Sam earned less than the Personal Allowance, see the guide for non-taxpayers.
These are general rules. HMRC works out the repayment from your full income for the year, so individual results vary.
How we handle it
Tax Repayments is an independent firm that makes R40 claims for people who received car finance compensation. When you use our service, we:
- check whether you’re likely to be owed anything, based on your income and the interest you were paid
- work out which tax year or years each payout belongs to
- prepare and submit the R40 to HMRC as your agent
- deal with any questions HMRC raises
- pay you the balance once HMRC repays, after our fees
Our how it works page sets out each stage, and our charges are on our fees page. You can also submit an R40 to HMRC yourself.
Common questions
Do I need one claim per payout? No. The R40 covers a tax year, so several payouts in the same year go on one claim. Our guide to multiple payouts explains more.
Can a claim be made for someone who has died? Sometimes, but the rules depend on when the payment was made. Read our guide on compensation for someone who has died.
Next step
Use our eligibility calculator to get a rough idea of whether any tax on your compensation could be repaid.