How Is Peer-to-Peer Lending Taxed?
This page was last updated on 21 December, 2018
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- Key P2P tax rules in bullets
- How much P2P interest can I earn before paying taxes?
- How much income tax do you pay on peer-to-peer lending?
- Am I taxed on peer-to-peer lending losses
- Are peer-to-peer lending fees tax deductible?
- Is peer-to-peer lending cashback taxable?
- Do I pay income tax on interest already paid when I buy an existing loan?
- Do I pay capital gains tax when selling peer-to-peer lending loans for a profit?
- For the rare cases I pay CGT, how much do I pay?
- How do I pay peer-to-peer lending taxes?
- Do IFISAs really offer completely tax free peer-to-peer lending?
- Can I do P2P lending through a pension?
- This was part eight of our ten-page P2P lending guide
When you earn money through peer-to-peer lending it is usually classed as income, so you could be charged income tax.
There are, however, huge tax breaks, including an automatic break for many people, as well as specific peer-to-peer lending accounts that you can open which are always tax free.
Key P2P tax rules in bullets
- Most people pay no income tax, because peer-to-peer lending is included in the Personal Savings Allowance. That’s £1,000 tax-free interest for basic-rate taxpayers and £500 for higher-rate payers.
- Basic-rate taxpayers will usually need to lend over £10,000-£30,000 to be charged taxes and higher-rate payers over £5,000-£15,000.
- You pay tax at your own income-tax rate on any interest earned above the savings allowance.
- Bad debts are tax deductible.
- Everyone can lend tax-free through IFISAs, which usually cost no more than ordinary P2P lending accounts.
- Pension lending is completely tax free, but it’s only currently suitable for people with a lot of money to lend due to the high pension costs.
- You're not likely to pay capital gains tax. But, if you invest a huge amount of money, it is possible that you will do so if you do a lot of buying and selling existing loans outside of IFISAs or pensions.
How much P2P interest can I earn before paying taxes?
Through the Personal Savings Allowance, basic-rate taxpayers are allowed to earn interest of £1,000 tax free from all their savings accounts and peer-to-peer lending accounts combined.
This means that, for basic-rate payers, you shouldn't usually expect to pay tax on any of your savings and P2P earnings until your pot size has grown larger than £10,000 to £30,000, depending on the interest rates you are earning.
Higher ratepayers also get a tax break, but it’s limited to the first £500 of interest.
Therefore, your interest earned on the first £5,000 to £15,000 of your pot probably won't be taxed, unless you earn sky-high interest rates.
Additional-rate taxpayers have no personal allowance.
Non taxpayers pay no tax on P2P lending, provided their total income remains under the basic-rate threshold.
More on the Personal Savings Allowance
The personal allowance only applies for interest earned using P2P lending sites that are regulated by the UK's Financial Conduct Authority.
Married couples and civil partners can each use their own personal savings allowances in separate P2P lending accounts. Note that if you have joint savings accounts, you'll need to call HMRC to let it know about joint accounts.
How much income tax do you pay on peer-to-peer lending?
If you earn more interest over-and-above your personal allowance, you’ll pay the same rate as your normal income-tax rate:
- Basic rate: 20%.
- Higher rate: 40%.
- Additional rate: 45%.
Therefore if you're a basic-rate taxpayer and you earn £2,000 in interest, £1,000 is tax free. Of the remaining £1,000, £200 (20%) will go to the taxman.
Am I taxed on peer-to-peer lending losses
We’re not taxed on losses, so you only pay taxes on the money you actually receive after losses.
You can offset losses at one peer-to-peer lending company with gains made at another one.
However, you can’t offset peer-to-peer lending losses against gains from other types of savings and investments.
We can carry forward loss relief up to 4 years.
Are peer-to-peer lending fees tax deductible?
On any interest earned over our tax-free limits, we're taxed on any lending fees that the peer-to-peer lending platforms charge directly to us lenders.
However, most platforms don't charge direct lending fees. They might charge variants like “loan servicing fees”, but these are tax deductible.
For the platforms that still charge direct lending fees, if you earn 6% interest and pay a 1% fee, you’ll have earned 5% after fees. But you'll still have to pay tax on 6% interest.
(If a P2P lending site says it charges no lender fee, don't believe that means it is free to lend! Read There's No Such Thing as “No Lender Fee”.)
Is peer-to-peer lending cashback taxable?
None of us are accountants but, as we understand it, cashback that induces you to lend money, or lend more money, is not lending income, and so it is not taxed.
When you really do something in return for the cashback then you are earning an income, which is taxable. This means that refer-a-friend cashback needs to be taxed at your own income-tax rate.
Do I pay income tax on interest already paid when I buy an existing loan?
Some P2P lending websites allow you to buy a loan that has already commenced, typically through a secondary market (which is like the stock market for P2P lending).
Usually, in these cases, interest is paid to the previous lender regularly, so there is little or no impact on you tax-wise.
However, if interest has been accrued and not yet paid – such as with loans that roll all the interest to the end of the loan – you will be liable for tax on all the accrued interest. Also, if the loan is repaid early, you could end up with a tax loss.
You could factor that into your calculations when deciding what price to pay for existing loan parts and you should spread your money across lots of loans so that you don't get unlucky on just one loan.
Do I pay capital gains tax when selling peer-to-peer lending loans for a profit?
We prodded and poked the taxman – aka HM Revenue & Customs – for straight answers (with limited success), we read and re-read the tax guides, and we consulted an accountant, who then discussed the matter with several other accountants.
It wasn't easy, but we now think we have a good handle on what the rules are regarding P2P lending and capital gains tax.
Firstly, the part that was always crystal clear:
- Very few people need to worry about paying capital gains tax.
- “CGT” is never due if you lend through IFISAs or pensions.
- You have to make a profit of £11,300 when selling your P2P loans and other investments before you need to read any further about capital gains tax. That is your annual, tax-free, capital gains tax allowance.
The grey area that we now think we've cleared up is: if and when do you pay capital gains tax outside of IFISAs and pensions? From our findings, here are the two key rules:
- If you are the original lender and you sell the loan to another person, you will not have to pay capital gains tax, even if you sell for an obscene profit.
- If you are selling loans for a profit that you have bought from another lender, these are taxable if you make profits above £11,300 in a single tax year on selling those loans and any other taxable investments.
Most of the time, P2P lending websites do not allow you to sell loans for more than you paid, or it otherwise tightly caps the profits you can make doing that. This further reduces the chances that you will pay CGT.
You also need to make a very large profit on the sale of your investments before it even counts, due to the generous CGT allowance. If you've made huge loan sale profits and think you might be liable, only count the profits on second-hand loan sales when working out if you have exceeded your tax-free allowance.
Some P2P lending sites only sell second-hand loans, which were originally funded by a wealthy lender before the loans were moved onto the P2P lending website for resale. However, all or most of those P2P lending websites do not allow you to sell for a profit.
For the rare cases I pay CGT, how much do I pay?
For any gains over your capital gains tax allowance, you'll be charged 20% if you're a higher-rate or additional rate taxpayer.
Non-taxpayers and basic-rate taxpayers will pay between 10% and 20%. You need to calculate your tax rate like this:
- Deduct your income tax personal allowance and any other income tax reliefs from the income you earned that same year.
- Deduct the capital gains tax allowance from the capital gains you made to find your taxable gains.
- Add both 1 and 2 together.
- You pay CGT at 10% if your answer to 3 is £45,000 or less.
- If it is more than £45,000, you pay CGT at 20% on the excess.
How do I pay peer-to-peer lending taxes?
Peer-to-peer lending companies provide an annual tax statement to make it simple to declare our P2P income to the taxman.
Some lenders who are basic-rate taxpayers have told us how they easily declare their peer-to-peer earnings to HM Revenue & Customs:
- Print off the annual tax statements you get from the P2P lending companies.
- Post them to your tax office with a brief letter stating you have untaxed income from peer-to-peer lending and that the evidence of the income is enclosed.
- Ask Revenue & Customs to adjust your personal allowance through your tax code.
So far, Revenue & Customs has found this satisfactory and it could save you from completing a full tax return.
If you complete a tax return already, you will have to include any taxable peer-to-peer lending interest in the return. You do this in the section “Interest and dividends from UK banks, building societies etc”.
Do IFISAs really offer completely tax free peer-to-peer lending?
P2P lending ISAs are now available. They're properly called Innovative Finance ISAs or “IFISAs”.
All interest and gains made in ISAs is completely tax free. These are still worth considering even if you currently earn less interest than your Personal Savings Allowance.
Read everything you need to know about them, and see which IFISAs are available, in The IFISA Guide.
Can I do P2P lending through a pension?
Particularly if you have a large amount to lend and invest, you can also cut your taxes by lending through a pension. Read how to do this in our P2P Pensions Guide.
This was part eight of our ten-page P2P lending guide
- Read part seven: Peer-to-Peer Lending Vs Other Investments.
- Read part nine: The IFISA (P2P ISA) Guide.
- See the contents of the whole guide.