Peer-to-peer loans (sometimes called “P2P loans”) are a kind of loan made through websites that match individual lenders with borrowers. They are done without a bank being involved in the process.
Interest earned through peer-to-peer loans get taxed just like interest from savings accounts:
- if you’re a basic rate taxpayer, your first £1,000 from peer-to-peer interest is tax-free (this is called the “personal savings allowance”)
- if you’re a higher rate taxpayer, this gets reduced to £500
- additional rate taxpayers don’t get a savings allowance
- anything above this personal savings allowance, you pay tax at the usual Income Tax rate.
Other things that you might need to know about P2P loans:
- some P2P lending websites also offer Innovative Finance ISAs (IFISA) for P2P loans. Any money you receive from them is entirely tax-free
- if you sell a P2P loan for a profit, you might need to pay Capital Gains Tax on it
- if one of your borrowers defaults (won’t pay you back), then you can claim it as “bad debt” and offset it against your income from other P2P loans.