The 2019 ISA season is now in full swing, and it's as good a time as any to focus on financial planning - and, within that, looking ahead to your retirement years to ensure financial security.
Quick guide to paying tax on P2P incomePopular
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 both a reserve fund, which protects against missed payments and loan defaults, and a series of insurance policies which protects against defaults not covered by the reserve fund, in addition to protecting against fraud and cybercrime. 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.
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