Is peer-to-peer lending interest taxable in the UK?

Full answer

Peer-to-peer (P2P) lending platforms let individuals lend money directly to other individuals or businesses, in return for interest, bypassing a traditional bank. For UK tax purposes, HMRC treats this interest exactly like other savings income, not as investment gains or trading profits. **How the interest is taxed** Interest received from P2P lending counts towards your Personal Savings Allowance (PSA) alongside interest from savings accounts, bonds and similar sources. For 2026/27: basic-rate taxpayers can receive £1,000 of savings interest (including P2P interest) tax-free; higher-rate taxpayers get £500 tax-free; additional-rate taxpayers get no PSA at all, so all their savings interest, including P2P interest, is taxable. Interest above your allowance is taxed at your marginal Income Tax rate -- 20%, 40% or 45%. **How it is reported** Most P2P platforms provide an annual statement of interest earned. If you complete Self Assessment, you must declare P2P interest in the savings income section of your tax return. If you do not normally file a return, HMRC may collect any tax owed through a change to your PAYE tax code, based on data it receives from platforms, or via a Simple Assessment. **Losses -- bad debt relief** P2P lending carries real credit risk: if a borrower defaults and you do not recover your capital, you may be entitled to claim bad debt relief, which allows you to offset the loss against P2P interest you have earned (including from other loans on the same or other platforms) in the same or a later tax year, reducing your taxable P2P income. This relief only applies to genuine, irrecoverable P2P loan losses, not general investment losses, and specific conditions apply, so keep records of any platform default notices. **Innovative Finance ISA (IFISA)** You can shelter P2P lending returns from tax entirely by holding your P2P investments within an Innovative Finance ISA, one of the four types of ISA alongside Cash, Stocks and Shares, and Lifetime ISAs. Contributions to an IFISA count towards your overall £20,000 annual ISA allowance (2026/27), and all interest earned within it is completely free of Income Tax, with no need to declare it. **Worked example** A higher-rate taxpayer lends £20,000 across several P2P loans outside an ISA wrapper and earns £1,400 of interest in the tax year. Their Personal Savings Allowance is £500, so £900 of the interest is taxable at 40%, giving a tax bill of £360. If they had instead used an Innovative Finance ISA for the same lending, none of the £1,400 would be taxable at all. **Risk warning** Unlike money in a bank or building society savings account, P2P lending is not covered by the Financial Services Compensation Scheme (FSCS) deposit protection in the same way -- capital is at risk, and platforms themselves have failed in the past, so tax efficiency should not be the only factor weighed when deciding whether P2P lending suits your circumstances.

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