Quick guide to paying tax on P2P income
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC separately.
Please note that the tax treatment of your income depends on your individual circumstances and may be subject to change in the future.
How do I declare my income to HMRC?
If you already fill in a Self Assessment Tax Return, you will need to include your peer-to-peer lending income on that, under the section “Interest and dividends from UK banks, building societies etc”. If you don’t currently have to complete a return, you should let your local Tax Office know about your interest. If you pay tax under Pay As You Earn (PAYE) your tax code will then normally be adjusted to collect the tax due on the interest you have earned. For more information on completing Self Assessment Tax Returns, please follow this link: https://www.gov.uk/topic/personal-tax/self-assessment
How will I know how much to declare?
In addition to your monthly account statements, you will receive an annual statement from Lending Works which shows the total interest you have earned during the tax year (which runs from 6 April – 5 April), in addition to any fees paid.
The Financial Conduct Authority (FCA) has confirmed with HMRC that the amount you are required to declare to HMRC is the full amount of interest arising in the tax year. This means the gross amount of interest paid under the loan agreement without any deductions for any fees or charges imposed by the platform or other party.
Therefore, the amount you will need to declare as income on your tax return is the gross interest received.
No more lender fees
We removed all lending fees in 2014, which means gross and net interest are actually the same for Lending Works lenders. If you lend with other fee-charging platforms, you will however incur a higher tax charge on the same net income, so you should consider this when comparing advertised returns.
Treatment of bad debts
As of April 2016, current UK tax law allows bad debts (i.e. borrower defaults) to be offset against income. Lending Works has gone the extra mile in protecting against bad debts anyway though, by using the Lending Works Shield. The Shield is a contingency fund, which protects against missed payments and loan defaults. We take great pride in the fact that all of our lenders have received exactly what they were owed since Lending Works first launched.
Innovative Finance ISAs
At the Summer Budget of 2015, HM Treasury revealed that a new Innovative Finance ISA (IFISA) would be going live from the commencement of the 2016/17 tax year. This new wrapper, which, at this stage, is only available through peer-to-peer lending platforms that are fully authorised by the FCA, allows lenders to earn tax-free returns on their lender capital up to the value of their individual ISA allowance each year (£15,240 for the 2016/17 financial year; increasing to £20,000 in 2017/18). Those lenders wishing to make use of an IFISA may thus not even need to pay tax at all.
There are of course certain rules and restrictions with IFISAs, which you can read more about by clicking here. However, there is no doubting the enormous benefits this new new tax efficiency will bring to consumer lenders for many years to come.
Personal Savings Allowance
Like the Innovative Finance ISA, the new Personal Savings Allowance (PSA) also went live from April 6, 2016. With the PSA, basic-rate tax payers will be able to protect interest (on savings accounts and peer to peer loans) of up to £1,000 per year from tax. For higher-rate tax payers this allowance drops to £500. So, in the example of a higher-rate tax payer, you’re looking at shielding a capital amount of roughly £10,000 from tax via the PSA alone; provided of course you don't use your PSA on interest from savings of course. Top-rate taxpayers will not be eligible for the PSA.
Need more information?
If you would like further information please do not hesitate to get in touch with us using the contact details listed in the Contact Us section of our website.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Related articles
- Summary of a post.
- Summary of a post.
- Summary of a post.
In line with our risk management framework, today we published our Q4 2019 performance update.
As a platform, we take great pride in all that we've achieved since opening our doors for business nearly six years ago. We’ve
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
Featured
Wednesday’s Budget speech, coupled with the cut to Bank of England rates, represented a decisive response to the coronavirus. Here we analyse the impact it will have on mitigating disruption from Covid-19, along with the long-term implications of this significant fiscal stimulus.
Rumblings from the Treasury ahead of next week's Budget suggest tax grabs will be needed to fund increased spending, and it appears UK enterprise could be in the firing line. Here we articulate why targeting entrepreneurs and small business is ill advised.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
There is a variety of literature and research illustrating the importance of building brand loyalty, albeit with some degree of variance.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The idea of peer-to-peer (P2P) lending is a simple one; you lend money to those who wish to borrow, with a view to receiving a great return for doing so.
Most popular
The 2019-20 ISA season has been a damp squib, with banks disinterested in attracting savers’ cash, rates cut, and the stock market in freefall. However, the emergence of the IFISA means alternatives beckon for those seeking a stable middle ground in terms of risk and reward.
In a decade of slow recovery, the rapid rise in asset prices has been the standout. But how sustainable has price growth been, and could we be in the midst of a bubble?
- Summary of a post.
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.
Open banking celebrated its second birthday last month, but has the ‘revolution for financial services’ that was promised actually come to pass? In this article, we look at the progress the initiative has made so far, and what the future holds in the face of high levels of scepticism.
On the face of it, a 'broken' energy market needed fixing, and the price caps introduced in early 2019 were heralded as the solution. But, one year later, have they actually helped consumers save?
Recent
The Lending Works Shield does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The Lending Works Trustee has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Lending Works Shield when considering whether or how much to invest. For more information click here.