How is peer-to-peer lending income taxed in the UK?

Full answer

Peer-to-peer lending returns are treated as interest, which is savings income for UK tax. The amount you can receive tax-free depends on the Personal Savings Allowance: GBP 1,000 for basic-rate taxpayers, GBP 500 for higher-rate taxpayers, and nil for additional-rate taxpayers. The starting rate for savings (up to GBP 5,000) can also apply if your non-savings income is low. Interest above your allowances is taxed at your marginal rate - 20%, 40% or 45% for 2026/27. A feature specific to P2P is bad-debt relief. If a borrower defaults and the loan becomes irrecoverable, you can generally set the capital loss against interest you receive from other P2P loans in the same or following four tax years. This matters because P2P platforms quote headline rates that ignore defaults, so your taxable interest should be reported net of relievable losses where the rules allow. Most platforms do not deduct tax at source, so the onus is on you. If your total interest exceeds your allowances, or you already file, you declare P2P interest through Self Assessment. Basic-rate taxpayers within their allowance and not otherwise filing may have nothing to do. Worked example: a higher-rate taxpayer earns GBP 1,500 of P2P interest and has GBP 300 of relievable defaults, giving GBP 1,200 net. The GBP 500 allowance covers part, leaving GBP 700 taxed at 40% = GBP 280. The tax-efficient route is the Innovative Finance ISA (IFISA). P2P loans held within an IFISA generate interest free of income tax, and they share the overall GBP 20,000 ISA allowance for 2026/27 across all ISA types. Use the savings interest tax calculator to estimate liability and the ISA calculator to plan contributions.

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