Your tax-related P2P lending questions answered
The last 12 months have generally produced a steady stream of good news for peer-to-peer lending platforms, with numerous beneficial regulatory changes having been proposed by Government in support of the industry and its lenders. Yet amid the feel-good factor, a recent announcement regarding lender fees by HMRC – later confirmed by the Financial Conduct Authority – might have been considered as something of a damp squib.
From 6 April 2015, personal taxpayers will no longer be able to offset lender fees or charges against interest earned under their loan contracts, and will need to declare the gross amount of interest arising during the tax year to HMRC. This is actually just a clarification of the existing rules, which HMRC accepted were not clear and therefore allowed lenders to declare their net income. It’s therefore unfortunate news for lenders making use of almost every P2P platform in the UK – except ours!
Lending Works did away with all lender fees in anticipation of this ruling last April, meaning that there is no difference between the gross and net interest you receive. However, lending with other fee-charging platforms will soon incur a higher tax charge on the same net income, which, in empirical terms, would mean a lower percentage of income going into your pocket than it did in this past tax year.
Tax, tax and less tax!
Budget 2015 gave us further reasons to cheer too, as George Osborne announced that interest earned on peer-to-peer loans will be eligible for the personal savings allowance. From April 2016, the first £1,000 of interest earned on all savings will be removed from income tax for basic-rate tax payers. For higher-rate tax payers, this amount drops to £500, but including P2P in this tax relief represents another major coup for the sector; especially when one considers that it will not apply to income earned from investments in shares or funds.
And the good times kept rolling at the House of Commons last week, as it was revealed that a consultation is taking place, and, depending on the outcome, Government could bring in a withholding tax regime from April 2017. Assuming the dice lands favourably, this means tax on lending income would be deducted at source, saving many lenders the hassle of completing a self-assessment tax return.
Will P2P and ISAs ever be united?
The Chancellor made the game-changing announcement at Budget 2014 that lenders would be able to hold peer-to-peer loans within Individual Savings Accounts (ISAs), and it emerged later in the year that a third-way ISA ISA, tailored specifically to P2P lending, could be introduced.
The final result? At the Summer Budget in July, we learned that a new Innovative Finance ISA (IFISA) will come into being next spring instead, although P2P loans will be a prominent commodity within this wrapper. Most importantly, this means that lenders will benefit from a significant tax saving. However, platforms will also be better-placed to define and communicate the risks and rewards of peer-to-peer lending than if P2P loans had simply been shoe-horned into the existing Stocks & Shares ISA. Happy days all round!
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.
The Lifetime ISA (LISA), announced in 2016, would prove to be one of George Osborne’s last flagship gestures to UK savers and investors as Chancellor, eventually launching against a backdrop of anti-climax a year later in April 2017.
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 peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
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.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.