Under current legislation, income generated from P2P lending activities is in some ways taxed in a very similar way to the way bank interest in taxed, in that you will need to pay HMRC tax at your marginal rate of income tax (either 20%, 40% or 45%, depending upon your circumstances).
Indeed under present legislation, the only difference between bank interest and peer-to-peer interest, from a tax perspective, is that with bank interest, HMRC automatically takes 20% up-front, whereas with peer-to-peer interest, it does not. Bank interest is, under general circumstances, paid to the recipient net (of 20%), whereas the peer-to-peer platforms pay their interest gross.
Until the launch of the new Innovative Finance ISA in 2016, the tax treatment of your peer-to-per lending income will depend on your individual circumstances and you will need to declare this income on your annual income tax return.
Under the current regime, you will need to complete and submit a Self-Assessment Tax Return, detailing, amongst your other tax circumstances and any other income, the income that you have received (whether through interest or dividend) from peer to peer lending activities.
Interest from peer-to-peer lending should, until the new Innovative Finance ISA regime is properly launched, be declared under the “Interest and dividends received from UK banks, building societies etc” section of the tax return.
For those taxpayers who do not otherwise need to submit a tax return currently, this will need to change from the tax year in which you first lent money under a non-Innovative Finance ISA peer-to-peer lending arrangement. If this is the case in your situation you should speak to HMRC about registering for Self-Assessment as the responsibility to notify HMRC (and to submit the return subsequently) is your legal responsibility.
In the majority of cases, non-Innovative Finance ISA-registered peer-to-peer interest will be paid gross, and you will either need to pay the tax liability on this at the end of the year, or you might otherwise ask HMRC to automatically collect this through your PAYE tax code going forwards. In the latter situation, the income you receive from your employer will be wound-down to the extent that you need to pay additional tax to cover non-IFISA peer-to-peer income.
How much tax do I need to pay on non-IFISA income?
The exact amount you need to pay tax on will depend entirely on the amount of interest your received from peer-to-peer lending activity, the extent to which you received other taxable income, and, amongst other things, your age and other tax circumstances.
In general terms however, you can expect to pay anywhere between 20% and 45% of the gross interest you received from the platform, over to HMRC at the end of the year.
In the majority of cases, the platform that you have lent money through should either provide you with a written (paper-based) interest statement at the year end, or at least access to that information electronically via the platform itself. This statement should cover the interest that you have earned during the most recent tax year, which runs from 6th April each year to the following 5th April.
We can confirm that, for interest earned outside of the IFISA regime, the FCA and HMRC have decreed that lenders must declare the interest income in full each year; in other words, this covers the full amount of interest receivable under the lending agreement with no allowances for deductions, fees, or charges (even the charges imposed by the lending platform cannot be deducted from the interest you received).
Note: because the position was not made immediately clear by HMRC or the FCA, HMRC has also noted that it will allow lenders, as a one-off, to declare this interest income net of fees until the end of the 2014/2015 tax year, but bear in mind that this tax return will need to be submitted by 31 January 2016. Income received on or after 6 April 2015 will need to be declared in full with no educations.
How will the platform fees impact my taxable income?
Outside of the IFISA, your income will be adversely affected by these rules because you will not be able to deduct lender fees from the gross interest when completing your tax return for non-IFISA income; in other words, you will in effect be paying tax on a higher amount of interest than you actually received from the lending platform.
What about loans I make which go sour?
In some cases you might make a loan (or the platform itself might make a loan on your behalf) in which the person or company who borrows the money fails to meet their repayment obligations; this is known as a borrower default, and is also sometimes called a bad debt.