How To Pay Tax On Peer To Peer Lending?

Peer to Peer Lending is an alternative to traditional investment options through which individuals can directly lend money to other people or businesses without the involvement of any bank. The process is carried out through internet intermediaries that are also known as peer-to-peer platforms. Investors can earn high returns from p2p loans, while the borrowers can find quick loans at low interest rates compared to conventional bank loans. When you put your money in bank saving accounts, the bank automatically deducts tax from the interest you earn. However, in Peer To Peer Lending, it is not the case. P2p platforms do not deduce tax from your interest. As an investor or lender, you have to declare your income to Her Majesty Revenue & Customs (HMRC), the UK’s tax authority. 

You should keep in mind that the tax treatment depends on your present circumstances so it can be changed in the future. So here we are providing a quick guide to pay tax on p2p income.

Peer To Peer Lending: How To Declare Your Income To HMRC? 

peer to peer lendingIf you already fill in a self-assessment tax return, you have to add your income from p2p loans under the section of interest and dividends from UK banks or building societies. On the other hand, if you do not need to complete your return currently, you should inform your local tax office about your interest. This is because if you pay interest under Pay As You Earn (PAYE), your tax code will be adjusted accordingly to collect the tax due on your interest. 

How Much Do You Need To Declare?

Peer-to-peer platforms provide you with an annual statement in addition to your monthly account statements. This annual statement represents the income you earn through p2p lending in a tax year that runs from 6 April to 5 April. The Financial Conduct Authority has set rules with the HMRC that the amount a lender is required to declare to HMRC is the total interest you earn in a tax year. It means the gross amount of interest that you receive under a loan agreement without deduction of any charges or fees imposed by any party or p2p platforms. Therefore, the amount you need to declare to HMRC is the gross amount of interest you earn from p2p loans. 

Some p2p platforms have removed all the lending fees, which means your gross and net income will be the same.

How Much Interest Can You Earn Before Paying Tax? 

The Financial Conduct Authority allows lenders to earn tax-free interest on their p2p capital. Lenders need to make Innovative Finance ISA or IFISA accounts to invest their all or some of their annual allowance in p2p lending. 

Through personal saving allowance, basic rate taxpayers are allowed to earn £1,000 tax-free interest from p2p lending all of their saving accounts combined. It means that as a basic rate taxpayer, you do not need to pay any tax on your p2p earnings until your interest exceeds £1,000. 

High rate taxpayers can also earn tax-free interest, but it is limited to £500 of interest.

Additional rate taxpayers do not have any personal saving allowance.

Non-taxpayers do not need to pay any tax until their total income from savings accounts and peer-to-peer lending remains under the £12,500 threshold for the basic tax rate.  

peer to peer lending

If you have a joint account with your partner, each of you can use your personal saving allowances in separate p2p accounts, and interest is split equally between both of you for tax purposes. 

If you earn more interest from p2p lending that exceeds the limit of your personal savings allowance and tax breaks, you will need to pay tax at the same rate as your normal income tax. It includes:

  • 20% tax as basic rate taxpayer. 
  • 40% s high rate taxpayer. 
  • 45% as additional rate taxpayer.

You can use your pension in p2p lending if you have a large amount to lend or invest. This way, you can save your income from taxes as you are investing from the pension.  

You need to pay tax on your p2p earnings according to your tax-paying category. You should go to the HMRC or your local tax office to declare your income and complete the tax payment process. 


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