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How The Budget Affects Peer-to-Peer Lending
With additional reporting by Matthew Howard.
The Budget today contained several direct effects on peer-to-peer lending:
No tax deducted automatically from savings
Over the passed few months, the Treasury has been umm-ing and ahh-ing over whether to ask P2P lending websites to automatically deduct basic-rate income tax from the interest we earn, much like banks already do for savings accounts.
Instead, Chancellor George Osborne has announced that they're going the other way.
To that end, it is scrapping the automatic deduction from savings accounts, with effect from April 2016. It is unlikely now to introduce an automatic deduction for peer-to-peer lending.
No automatic deduction means we'll earn slightly more interest. This is because we will be able to earn interest on the tax money until we hand it over to the taxman.
First £1,000 of savings income is tax free
The next announcement is possibly to prevent large numbers of people flooding Revenue & Customs with brief, annual letters declaring the tax that will no longer be taken automatically.
It's good news for basic-rate and higher-rate taxpayers, with the following changes starting in April 2016:
Impact on basic-rate taxpayers
You will no longer be taxed on the first £1,000 of interest earned each year from savings.
In a savings account, at current interest rates, you might therefore need to have £40,000 to £100,000 of savings before you'll be taxed.
The interest earned on peer-to-peer lending is included. This means that probably the first £10,000 to £30,000 of the money you lend each year won't be taxed!
Impact on higher-rate taxpayers
You will no longer be taxed on the first £500 of interest earned each year from savings.
In a savings account, at current interest rates, you might therefore need to have £20,000 to £50,000 of savings before you'll be taxed.
The interest earned on peer-to-peer lending is included. This means that probably the first £5,000 to £15,000 of the money you lend each year won't be taxed!
P2P ISA Freedom!
Of course, you could just wrap up your savings in an ISA anyway and that's the end of the tax matter.
But not yet for P2P lending.
While a CEO in the industry told us that he expects the new P2P ISAs to arrive within 6-12 months, it wasn't announced in this Budget. However, it announced it will consult in summer about how to make this happen.
Still, there's good news that will help us lenders out when they do arrive: you'll be allowed to withdraw money from an ISA and put it back in again in the same tax year without losing that part of your ISA allowance.
This change is coming in autumn 2015, so it might even be here before the new P2P ISAs.
Small detour away from P2P
More exciting for many of you than P2P ISAs is the new Help to Buy ISA. You might be required to choose between this ISA and a P2P ISA each year, but this new scheme will support people saving to buy their first home.
With these ISAs, the taxpayer will help pay the deposit on your first mortgage. For each £200 you save, the nation will pay in £50. That's up to a limit of £9,000 of your savings and £3,000 from the government. For couples with two ISAs, that'll be £6,000 from the taxpayer.
And so the government has found another way to push up property prices! But that shouldn't stop you taking advantage.
Buying your own home is one of the ways that most people should consider saving and investing. That's what all of us writing for 4thWay® think anyway. The other ways are savings accounts (including cash ISAs), the stock market and the “4thWay”, the peer-to-peer lending way.
Read more about other investments that we think you should consider in Matt's article: The Investment That's Better Than P2P Lending.
And read about another recent tax announcement in Lender Fees to be Taxed – No Big Deal.
This article was updated on Friday 20 March 2015, when we learned that P2P lending will be included in the £1,000 tax break.