Which P2P Lending Companies’ Lending Fees Are Not Tax Deductible?

We had a query from a 4thWay user about tax rules on lender fees recently, so I thought we could answer that for everyone.

The reader was asking about whether lender fees are tax deductible, what that even means, which P2P lending companies currently charge fees that aren't tax deductible, and what the impact is on your returns.

I'll cover all that and more: including giving you an example of how much extra you'll pay in taxes when the fee is not tax deductible.

Before I do, please realise that tax on fees is just a very small piece of the puzzle. As will become clear to you at the end of this page, the main cost that hits your returns is the spread between all the interest and fees that the borrowers pay and what lenders receive. So keep your reaction to any fees that are not tax deductible in proportion!

What does “tax-deductible fee” mean?

In simple terms:

1. You earn interest.
2. You pay a fee to the P2P lending company that is related to that income.
3. The government lets you deduct that fee from your income, so you pay tax on a lower level of income.

So if you earn £110 in interest and you pay a £10 tax-deductible fee while earning that interest, it means you can pay tax on just £100 instead of £110.

If that same £10 fee is not tax deductible, it means you pay income tax on the full £110. That's what happens when your bank pays you interest on money in your current account, if you also pay a monthly or annual fee for that account. Bank fees are not tax deductible in personal bank accounts.

Firstly, consider whether the tax treatment of the fee is irrelevant

If you're lending through an IFISA then there are no taxes, so the usual tax treatment of the fee is irrelevant.

Also, the first £1,000 in interest that you earn in savings and P2P lending accounts is tax free if you're a basic ratepayer and the first £500 is tax free if you're a higher-rate payer, so you have no need to offset that interest against taxes. That allowance is called the personal savings allowance.

Therefore, if you use IFISAs, or if you're confident that you'll earn a lot less interest than your allowance in all your regular P2P lending accounts and savings accounts combined, you probably don't need to concern yourself about whether a fee is tax deductible – because you'll have no income tax to deduct it from!

Next, establish what kind of fee it is

Lender fees are your costs to peer-to-peer lending providers for services specifically for you: managing and providing your lending account, distributing payments to you, handling tax documents and reporting.

That fee is typically based on how much you're lending, the interest you've received, or both.

Loan-servicing fees are technically paid by the borrower, although borrower costs – regardless of how they're charged or what they're called – still reduce your own lending returns.

These fees are for collecting loan payments, handling late payments and defaults, providing customer service, and maintaining records and regulatory compliance about the loans. Essentially, administering the loans from inception till they are repaid or written off.

Which P2P lending fees are tax deductible?

Are loan-servicing fees tax deductible?

Fees charged to borrowers – such as loan-servicing fees – are tax-deductible, meaning that if the interest rate is 8% and the borrower pays a 1% loan-servicing fee, then you really earn 7%, and that is what you're taxed on.

In this case, there won't usually be anything special for you to calculate or do, since you'll simply be presented with the lender rate after all the borrower costs have already been deducted.

Those borrower costs make up part of the borrowers' total APR, which (if calculated correctly by the P2P lending company) factors in all the fees and interest they pay and is shown in the borrowers' small print in their loan contracts.

Everything you receive is already after the fee and so any taxes you pay on that will already take the tax-deductible fee into account.

Are lender fees tax deductible?

Lender fees, in contrast, are unfortunately not tax deductible. HMRC confirmed this many years ago and the situation hasn't changed.

These fees show in the small print of your lending contract instead of in the borrowers' small print.

(However, if you're lending through a corporate account, all costs and expenses can typically be deducted as usual from your revenue.)

This means that if the interest rate is 8% and there's a 1% lender fee, you're taxed on 8%, even though you only receive 7%.

Again, this is irrelevant in IFISAs or if you're under your personal savings allowance.

What's in a name?

There's no law or tax rule that forces peer-to-peer lending companies to use the same names for their fees – and they don't. So sometimes you need a help distinguishing between the types of fees.

One of the best ways to distinguish between lender fees and borrower fees (including loan-servicing fees) is whether the fee is specified in your lender terms, and thereby showing it's a fee that has been technically allocated to you.

Another way – perhaps a simpler shortcut as it doesn't mean reading small print – is to establish whether there's a spread between the interest rate the borrower pays and that offered to lenders. Usually this is pretty apparent if you scan a few web pages on the provider's website. In that event too, you can be pretty sure the borrower is the one who is technically being charged, so you're not taxed on it.

(And once again: all fees reduce your returns, regardless of whether the provider technically allocates it to borrowers or lenders.)

Which P2P lending providers charge fees that are subject to tax (i.e. lender fees)?

The providers listed on 4thWay that explicitly charge lending fees are:

P2P lending company	Lender fee	Example cost of lender fee
Invest & Fund*	0.75% per year, based on the amount you're lending.	Currently this is around 85 pence in lender fees for every £10 in interest earned.1
Proplend*	10% of the interest paid out to you.	You always pay £1 in lender fees for every £10 interest you are paid out.
Rebuildingsociety	0.1% per month on all your assets. Assets include the cash in your account, your money being lent and accrued interest.**	Currently this is probably around 70 pence in lender fees for every £10 in interest earned.1 2
Crowd2Fund	1% per year on your lent money and interest paid out to you.	This is probably £1.50 in lender fees for every £10 in interest earned.1

¹With this fee structure, the exact amount of pence paid per £10 of interest earned will vary somewhat, because it depend on the specific interest rates you're earning and over what time period.
²While Rebuildingsociety's website refers to this as an IFISA fee, the small print for lenders refers to it as a lending account fee and doesn't state that it's limited to its IFISA only.

Please get this into your heads: the fact that the Invest & Fund charges 0.75% and the others in the table also charge lending fees doesn't mean that other providers don't reduce your returns through a cost technically charged to the borrower by the same amount or more!

The only difference to you is that you're taxed on it, because the fee is technically charged to you.

Just to pluck any example out, CrowdProperty charges a spread between borrower and lender rates that has averaged 1.5 percentage points since the start of 2024 (among other borrower fees). While that spread is technically charged to the borrower, it still reduces your returns. The interest structure and multitude of fees for borrowers can be complex!

How much extra will you pay in taxes as a result of lender fees not being tax-deductible?

I hope you understand that the size of the fee itself is not the point I'm making, as other providers will be reducing your returns by similar amounts or more through charges to the borrower.

The point I'm making is the amount of additional taxes you'll have to pay, which is a smaller amount (and thus is less relevant to you than the total amount of borrower and lender fees combined).

Here's how much the non-tax-deductible lending fees above will increase your taxes. I am making estimates that will be close for most people, but it will vary based on exactly how much you lend, for how long, and at what interest rates:

Invest & Fund

If you earn £1,000 in interest after fees and bad debts** (for which you'd probably have to be lending more than £11,000 per year) you'll pay tax on about £1,085 including fees. That's unless you use an IFISA. Up to £1,000 of that will also be tax free if you use your personal savings allowance on it.

As a basic-rate payer, if you're not using your personal savings allowance, that means paying £217 in taxes instead of £200 – so perhaps an additional £17 in taxes per £1,000 earned. For higher-rate payers, it means paying £434 in taxes instead of £400.

I'd like to put this another way so that you can get more perspective as it is actually a very small impact. Put another way, it's like an additional cost of 0.15% of your total lent if you're a basic ratepayer. In other words, it's the equivalent perhaps of a 0.9% (tax deductible) loan-servicing fee charged to the borrower rather than a 0.75% lender fee charged to you. For higher ratepayers, it's the equivalent of about 0.3% of your total lent.

That is nothing compared to most of the spread that you'll be facing between what borrowers pay and you actually receive.

Proplend

If you earn £1,000 in interest after fees and bad debts (for which you'd probably have to be lending around than £13,000 per year) you'll pay tax on about £1,111 including fees outside of an ISA and if you're not using your personal savings allowance.

As a basic-rate payer, if you're not using your personal savings allowance, that means paying £222 in taxes instead of £200 per £1,000 paid out to you. For higher-rate payers, it means paying £444 in taxes instead of £400.

It's like an additional cost of perhaps 0.17% of your amount lent if you're a basic ratepayer and 0.34% if you're higher rate.

Rebuildingsociety

If you earn £1,000 in interest after fees and bad debts (for which you'd probably have to be lending very roughly £5,000 per year – although it's very hard to estimate this because returns have varied so considerably and we don't receive detailed data) you'll pay tax on perhaps £1,130 including fees outside of an ISA and if you're not using your personal savings allowance.

As a basic-rate payer, that if you're not using your personal savings allowance, that means paying £226 in taxes instead of £200 per £1,000 paid out to you. For higher-rate payers, it's £452 in taxes instead of £400.

It's equivalent perhaps to an additional fee of 0.5% – or 1% if you're a higher ratepayer.

Crowd2Fund

If you earn £1,000 in interest after fees and bad debts (for which you'd probably have to be lending perhaps approaching £17,000 per year – although this one is also impossible to estimate closely) you'll pay tax on perhaps £1,180 including fees outside of an ISA and if you're not using your personal savings allowance.

As a basic-rate payer, if you're not using your personal savings allowance, that means paying £236 in taxes instead of £200 per £1,000 paid out to you. For higher-rate payers, it's £472 in taxes instead of £400.

That's worth about 0.21% of your total lent if you're a basic ratepayer and 0.42% if you're higher rate.

Further reading and pages linked to above

While most P2P lending providers no longer charge direct lending fees to lenders – probably because they're not tax deductible – it doesn't mean that your lending is free, because it isn't: There’s No Such Thing as “No Lender Fee”.

Read everything you need to know in: How Does Peer-to-Peer Lending Tax Work?

The Peer-To-Peer IFISA Guide.