In Chancellor George Osborne’s Budget announcement earlier this year, he announced that cash ISAs would become more flexible and that non-ISA savings (including P2P) would receive a tax-free exemption up to £1000. Initially there was some doubt cast over whether Peer-to-Peer lending would be affected by these changes; but The Treasury has since gone on to confirm its inclusion into the scheme.
From April 2016 onwards, the first £1000 of P2P earnings will be completely tax-free, with a £500 capped limit for higher rate taxpayers. This change applies to Peer-to-Peer lenders’ full allowance and takes into consideration any returns from other savings accounts; including banks and building societies.
Automatic Tax Deduction
The automatic deduction of basic-rate income tax from the interest you earn has been cast out too. This change means Peer-to-Peer customers will earn slightly more interest as they will be able to earn interest on the taxable amount before handing it over to the taxman.
Impact on Basic-Rate Taxpayers
Basic-rate taxpayers will not be taxed on the initial £1000 of interest earned each year. With the current interest rates on saving accounts, this means you may need to have between £40,000 and £100,000 before being taxed. For Peer-to-Peer lenders, this means that the first £10,000 to £30,000 of cash that you lend will not be taxed.
Impact on Higher-Rate Taxpayers
Higher-rate tax payers will no longer be charged tax on the first £500 of interest earned from funds each year. Therefore, with current interest rates taken into consideration, you might need to have between £20,000 and £50,000 of savings before being taxed. The interest earned via P2P lending is included; meaning anywhere between £5,000 and £15,000 of the money you lend annually will not be taxed.
P2P ISAs
P2P ISAs are expected to arrive properly in the future, allowing customers to wrap up their money in an ISA where it will not be taxed. People will be permitted to withdraw cash from an ISA and place it back in the same tax year without losing a part of the ISA allowance.
Wellesley & Co Provide Information
This announcement from The Treasury is extremely good news for a growing industry of Peer-to-Peer lenders. The changes are extremely welcome amongst those who are considering alternative finance platforms by a way of investment.
Wellesley & Co provide details on our FAQs section regarding how Peer-to-Peer lending is taxed. Please note that Wellesley are not advisors, we do not offer tax guidance and if you wish to seek advice, please contact an independent advice service.
Generally, for all P2P lending terms, tax is paid gross. Wellesley & Co does not withhold tax from the interest you make. As a lender you will have to pay tax on the interest you make, at your personal income tax rate.