Comparison · Investing · 2026/27
Peer-to-Peer Lending vs Innovative Finance ISA UK 2026/27
P2P lending held outside an ISA pays taxable interest. An Innovative Finance ISA shelters the same underlying investment from tax, using your GBP 20,000 2026/27 allowance -- but the wrapper does not change the underlying default and liquidity risk, and neither is FSCS-protected.
Key facts -- 2026/27
- • ISA allowance: GBP 20,000 total, shared with Cash/S&S ISAs
- • FSCS protection: none for P2P, in or outside an ISA
- • Typical target returns: ~4-8%+ (not guaranteed)
- • Regulation: FCA-authorised platforms required
- • Personal Savings Allowance (outside ISA): GBP 1,000 basic / GBP 500 higher / GBP 0 additional
- • Liquidity: fixed terms, secondary market exit not guaranteed
Tax Treatment: The Core Difference
The underlying investment -- a loan to borrowers via a P2P platform -- is identical whether held directly or within an IFISA. The only difference the ISA wrapper makes is tax: interest and returns within an IFISA are entirely tax-free, while interest from direct P2P lending is taxable income using your Personal Savings Allowance.
Because P2P rates are often materially higher than standard savings rates, holding a meaningful sum outside an ISA can use up your Personal Savings Allowance quickly, making the IFISA wrapper particularly valuable for larger P2P allocations.
Worked Example: GBP 10,000 at 6% Target Return
| Item | Outside ISA (higher-rate taxpayer) | Within IFISA |
|---|---|---|
| Gross return (target) | GBP 600 | GBP 600 |
| Tax (above PSA, at 40%) | ~GBP 40 on excess over GBP 500 PSA | GBP 0 |
| Net return (before defaults) | ~GBP 560 | GBP 600 |
Illustrative only -- excludes the effect of any borrower defaults, which apply equally in or outside the ISA wrapper. Use the ISA calculator to model tax-free growth generally.
Side-by-Side Comparison
| Factor | P2P outside ISA | Innovative Finance ISA |
|---|---|---|
| Tax on returns | Taxable above PSA | Tax-free |
| Default/platform risk | Same as IFISA | Same as direct |
| FSCS protection | None | None |
| Uses ISA allowance | No | Yes, within GBP 20,000 |
| Best for | Small amounts, allowance used elsewhere | Larger P2P allocations |