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Tax and Peer-to-Peer Lending
The Current Situation
Income tax currently applies to the interest you earn on peer-to-peer investments as it does with normal savings accounts. You will either pay 20%, 40% or 45% on your earnings depending on your income tax band. At present (2016) the tax-free personal allowance in the UK is £10,600, and if your total income including interest from any peer-to-peer loans goes above this, you will pay tax on the amount above the tax-free allowance.
We will send you an annual interest statement and you will have to declare the interest you earn from peer-to-peer investments to HMRC using a self-assessment tax form. The deadline to pay any tax you owe for the previous tax year is on 31st January each year.
Here are some changes coming to tax on peer-to-peer investments next year:
Personal Savings Allowance
In the 2015 budget a tax-free personal savings allowance was introduced, allowing basic rate tax payers to earn £1,000 a year and higher rate taxpayers £500 a year interest on savings without paying tax on it. This will apply from April 2016 and will include interest from peer-to-peer lending as well as from cash savings.
Bad Debt Tax Relief
Another change coming into force in April 2016 is that individuals investing through peer-to-peer lending platforms will be able to offset losses from bad loans against gains from other loans when calculating tax on the interest they have earned. At the moment, investors have to pay tax on the gross interest earned from loans, but after next April they will only pay tax on the actual amount they receive after subtracting losses from bad debt and fees from the gross interest figure. The change will apply retrospectively, with investors able to claim for tax relief on losses incurred since April 2015. This change was introduced in the 2014 Autumn Statement and is great news for investors, with estimates that they could be on average 25% better off per year.
Innovative Finance ISA
Currently, there are two types of ISA which allow people to save up to a certain amount tax-free: the Cash ISA and Stocks & Shares ISA. However, from 6th April 2016 peer-to-peer lending will be included in the list of ISA-eligible investments meaning that users will be able to lend up to the annual ISA allowance (£15,240) and receive tax-free returns through the new Innovative Finance ISA (IFISA).
P2P platforms including LendingCrowd are set to launch IFISA products, allowing investors to lend to businesses or individuals without paying tax on interest. You can use all of your ISA allowance in one type of ISA, or in a combination of cash ISA, stocks and shares ISA, and IFISA. The new Innovative Finance ISA was created separate to the existing types of ISA as it will have different rules, which were clarified by the government in December 2015. Debt securities offered via crowdfunding platforms were also announced to be included in the Innovative Finance ISA from Autumn 2016, but the government are still consulting on whether equity-based crowdfunding will be included.
Read more about the Innovative Finance ISA here.
So good news in 2016 as investors will pay less tax on peer-to-peer investments, receiving greater returns.
Other tax news for the Alternative Finance sector
Peer-to-peer withholding tax: The 2014 Autumn Statement also proposed new rules on withholding tax applied on P2P loans that it is expected will take effect from April 2017. A consultation on these proposals took place between July and September 2015 with the outcome yet to be announced.