Peer-to-Peer Lending Tax UK: 2026/27 Investor Guide

Quick answer

Peer-to-peer lending interest is taxed in the UK as savings income at your marginal Income Tax rate after the Personal Savings Allowance. Basic-rate taxpayers shelter GBP 1,000 a year, higher-rate GBP 500, and additional-rate nothing. Interest is paid gross, so you must declare it. Holding loans in an Innovative Finance ISA makes the interest entirely tax-free.

How P2P interest is taxed

When you lend money through a peer-to-peer platform, the borrowers pay you interest. For tax purposes that interest is treated identically to interest from a bank or building society - it is savings income. It is not a dividend, and it is not a capital gain. That single fact drives almost everything else about how you are taxed.

Savings income sits on top of your other income. HMRC first applies your Personal Allowance of GBP 12,570, then your earnings and pensions, and then your savings interest. The rate you pay on each pound of P2P interest depends on which Income Tax band that pound falls into once everything is stacked up.

The headline bands for 2026/27 in England, Wales and Northern Ireland are:

Use the

to see exactly how much of your P2P interest you keep once your allowances and band are taken into account.

The Personal Savings Allowance

The Personal Savings Allowance (PSA) is the main shield for ordinary lending accounts. It works as a 0 per cent band on top of your other allowances:

• Basic-rate taxpayers: GBP 1,000 of interest tax-free.
• Higher-rate taxpayers: GBP 500 of interest tax-free.
• Additional-rate taxpayers: GBP 0.

P2P interest counts towards the same allowance as your bank interest, so if you already earn interest from savings accounts, you need to add it all together. Only the combined total above your PSA is taxable.

The starting rate for savings

There is a second, less well-known relief: the starting rate for savings. If your non-savings income (earnings and pensions) is low, a band of savings income can be taxed at 0 per cent. This is separate from, and in addition to, the Personal Savings Allowance.

The available starting-rate band shrinks as your non-savings income rises above the Personal Allowance, so it mainly helps people with modest wages, early-retirement income or a gap year. If your only income is P2P interest, a large slice of it could fall within the Personal Allowance and the starting rate combined before any tax is due. Model your own position with the

before assuming you owe anything.

Innovative Finance ISA: the tax-free route

The cleanest way to remove P2P interest from tax altogether is an Innovative Finance ISA (IFISA). This is a tax wrapper designed specifically for qualifying peer-to-peer loans and similar debt-based investments.

Key points for 2026/27:

• The IFISA shares the single overall ISA allowance of GBP 20,000 with cash ISAs, stocks and shares ISAs and Lifetime ISAs.
• Interest earned inside an IFISA is free of Income Tax and does not use your Personal Savings Allowance.
• IFISA interest never appears on your Self Assessment return.

Remember the GBP 20,000 is a single annual allowance across all ISA types. If you also pay into a Lifetime ISA - which adds a 25 per cent government bonus of up to GBP 1,000 a year - that contribution counts towards the same GBP 20,000. Plan your split before the tax year ends. The

can help you allocate the allowance.

How and when to declare P2P interest

Since April 2016, P2P interest has been paid gross, with no tax deducted at source. You receive the full amount and HMRC relies on you to report it.

How you report depends on your circumstances:

• If you already complete a Self Assessment return, enter the interest in the savings income section.
• If you do not file a return but your untaxed interest exceeds your allowances, you should tell HMRC, who may adjust your tax code to collect the tax.
• If your interest is comfortably within your allowances, there may be nothing to pay and nothing to report, though keeping records is still sensible.

Every reputable platform produces an annual tax statement. Download it, and reconcile three figures: gross interest earned, platform fees, and any bad debt. Those numbers feed directly into your return.

Bad-debt relief on defaults

P2P lending carries real risk: borrowers can default. The tax system recognises this through bad-debt relief.

If a loan becomes irrecoverable, you can usually set the lost capital against P2P interest from the same tax year, and carry forward unused losses to offset future P2P interest. The important limits are:

• Relief applies to the outstanding loan capital, not to fees or expected future interest.
• Losses can only be set against P2P interest, not against your salary, pension or other income.
• You must keep evidence of each default and the amount written off.

This is why platform statements matter. A year with heavy defaults can wipe out your taxable interest, but only if you have the figures to support the claim.

Scotland: which rates apply

Scottish taxpayers face devolved Income Tax bands - Starter 19%, Basic 20%, Intermediate 21%, Higher 42%, Advanced 45% and Top 48% - but these apply to non-savings, non-dividend income only. Savings interest, including P2P interest, is taxed at the UK-wide rates of 20, 40 and 45 per cent.

In practice that means a Scottish lender works out which UK savings band their interest falls into using their total income, then applies the UK savings rates. The Scottish bands still matter, because they determine how much of your Personal Savings Allowance you get and where your savings income stacks.

A worked comparison

Consider three lenders, each earning GBP 1,500 of P2P interest in 2026/27, all resident in England:

The pattern is clear. The higher your marginal rate and the larger your interest, the more an Innovative Finance ISA is worth. For a basic-rate lender with modest interest, the PSA may already cover everything, and the IFISA mainly buys certainty and headroom for future growth.

Practical checklist

• Add P2P interest to all other savings interest before checking against your Personal Savings Allowance.
• Use the IFISA wrapper to shelter interest if you are a higher or additional-rate taxpayer, or if your interest already exceeds your PSA.
• Keep the GBP 20,000 ISA allowance in mind across all your ISA types.
• Download annual tax statements and reconcile interest, fees and defaults.
• Claim bad-debt relief against P2P interest where loans have genuinely failed.
• If unsure whether you need to report, check your total untaxed interest against your allowances first.

Common mistakes to avoid

The first mistake is assuming interest is taxed at source. It is not - the responsibility is yours, and forgetting can lead to a backdated bill plus interest.

The second is treating P2P returns as capital gains. They are savings income, so the GBP 3,000 annual exempt amount and CGT rates of 18 and 24 per cent do not normally apply. CGT only enters the picture if you sell a loan part on a secondary market for a profit, which is uncommon for buy-and-hold lenders.

The third is overlooking bad-debt relief. Lenders who suffer defaults but never claim relief can end up paying tax on interest they effectively lost.

The bottom line

Peer-to-peer lending is taxed simply once you grasp the core rule: the interest is savings income, taxed at your marginal rate after the Personal Savings Allowance and, where it applies, the starting rate for savings. For anything beyond your allowances, the Innovative Finance ISA is the single most effective tool, turning a 40 per cent tax charge into nothing. Keep good records, claim relief on defaults, and model your own numbers with the

before you file. Tax rules change and individual circumstances vary, so check the current position on gov.uk or with a qualified adviser if your situation is complex.