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Peer-to-Peer Taxation

Last updated 14-03-2024

Date Version Summary of changes from last version
03/10/19 v1.1 Webpage created
14/03/24 v1.2 Emphasis of lender taxation responsibilities

1. Introduction

Money earned through peer-to-peer lending is usually classed as income, so you could be charged income tax on the earnings.

Most won't pay any tax at all because of the personal savings allowance and the availability of Innovative Finance ISA (IFISA) products.

IMPORTANT: JustUs lenders are responsible for calculating and paying their own tax.

Tax Rules relating to Peer-to-peer investments:

  • • The personal savings allowance allows basic rate taxpayers to earn up to £1,000 of tax-free interest. Higher rate taxpayers only have an allowance of £500.
  • • Basic-rate taxpayers would need to lend over £10,000-£30,000 to be liable for any tax.
  • • High-rate taxpayers would need to lend over £5,000-£15,000 before tax would be due.
  • • Tax is payable at your current, personal rate of taxation on any earnings over and above your savings allowance.
  • • IFISA's allow everybody to lend tax free (limits will apply).
  • • Pension Lending is also free of taxation but is generally only suitable for those with significant sums to invest due to the ongoing costs associated with the pension.
  • • CGT may apply to those who invest significant sums and buy/sell many loans outside of an IFISA or pension.
  • • Bad debts are tax deductible.

2. Innovative Finance ISAs

An Innovative Finance ISA (IFISA) allows P2P loans to be held in an individual savings account (ISA). This means the interest received from P2P loans would be tax free and you avoid being taxed on any capital gains (generally applicable for those with significant investments).

An IFISA allows you to lend up to an overall limit of £20,000 per tax year. The £20,000 annual contribution allowance is shared between all types of ISA: IFISAs, cash ISAs, lifetime ISAs, and stocks and shares ISAs.

There is no requirement to declare ISA interest, income or capital gains to HM Revenue & Customs on any gains within an IFISA product.

3. How much interest can I earn from P2P investments before I am liable for tax?

Basic-rate taxpayers
Basic-rate taxpayers are allowed to earn £1,000 of combined interest from all of their savings accounts (including P2P investments) tax free.

As a basic-rate payer, you shouldn't expect to pay tax on gains from your savings and P2P investments until your pot size has grown larger than £10,000 to £30,000. This figure will be dependent on the interest rates you are earning from the investments.

Currently normal basic-rate taxation is at 20%

Higher-rate taxpayers
High-rate taxpayers are allowed to earn £500 of combined interest from all of their savings accounts (including P2P investments) tax free.

As a high-rate payer, you shouldn't expect to pay tax on gains from your savings and P2P investments until your pot size has grown larger than £5,000 to £15,000. As with basic-rate taxpayers this figure will be dependent on the interest rates you are earning from the investments.

Currently normal high-rate taxation is at 40%

Additional-rate taxpayers
There is no personal allowance for additional-rate taxpayers so tax would be payable on all gains from eligible savings.

Currently normal additional-rate taxation is at 45%

Non taxpayers
As long as your income remains under the basic-rate threshold, no tax would be payable on P2P investments.

4. Taxation on losses

You would only pay tax on income received after losses have been considered. Losses can be offset against gains made between multiple P2P lenders but cannot be offset against other savings products. The loss relief can be carried for 4 years.

5. Taxation on purchased loans

When you purchase a loan on the secondary market, the interest received prior to your ownership will have been paid to the previous lender and therefore is part of their tax liability. The interest earned from the investment following your purchase forms part of your liability.

When you complete a tax return, you will include any taxable peer-to-peer lending interest in the "Interest and dividends from UK banks, building societies etc" section.

If you do not normally complete a tax return, you could write directly to HMRC including a copy of your annual tax statement and request that they adjust your tax code to reflect the income earned from your P2P investments.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED AGAINST IT. IF YOU ARE THINKING OF CONSOLIDATING EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU WILL REPAY.