Peer-to-peer lending lets individuals lend money directly to borrowers or businesses through an online platform in exchange for interest, offering potentially higher returns than a savings account -- along with correspondingly higher risk. This guide explains how P2P interest is taxed, how the Personal Savings Allowance applies, how bad debt relief can offset losses from defaulted loans, and how using an Innovative Finance ISA changes the picture in 2026/27.
How P2P Interest Is Taxed
Interest earned from peer-to-peer loans held outside an ISA is treated as savings income, taxed in the same way as bank or building society interest, and is set against your Personal Savings Allowance before any further Income Tax is due.
In 2026/27 the Personal Savings Allowance is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and £0 for additional-rate taxpayers (who pay tax on all savings interest, including P2P interest, from the first pound). Interest above your allowance is taxed at your marginal Income Tax rate.
Bad Debt Relief for Defaulted Loans
A distinctive feature of P2P taxation is bad debt relief: if a loan you have made through a platform defaults and is written off as irrecoverable, you can offset that loss against P2P interest income, reducing the interest on which you are taxed. This applies specifically to interest income from P2P lending -- it is not a general Capital Gains Tax loss relief, and it cannot be set against other types of income like employment earnings.
Platforms usually provide an annual tax statement showing gross interest received and amounts written off as bad debt, which you use to calculate your net taxable P2P income for the year.
Sheltering Returns in an Innovative Finance ISA
An Innovative Finance ISA (IFISA) allows P2P lending returns to be earned completely tax-free, within your overall £20,000 annual ISA allowance for 2026/27, shared across any Cash ISA, Stocks and Shares ISA, Lifetime ISA and IFISA you pay into during the year.
Not all P2P platforms offer an IFISA option, and not all types of loan on a given platform are eligible to be held within one, so check with your platform whether your chosen investments qualify before assuming IFISA tax treatment applies.
Reporting P2P Income to HMRC
If your total P2P interest (net of any bad debt relief), combined with other savings interest, exceeds your Personal Savings Allowance, the excess is taxable and generally needs to be reported to HMRC -- either through your tax code if you are employed and HMRC already has the information, or via a Self Assessment return if you already file one or the amounts are significant.
Many P2P platforms report interest paid directly to HMRC, similar to how banks report savings interest, but you remain responsible for declaring taxable amounts correctly, particularly where bad debt relief needs to be calculated and applied.
Frequently Asked Questions
Is peer-to-peer lending interest taxable?
Yes, interest from P2P lending held outside an ISA is taxable as savings income, in the same way as bank interest, and is set against your Personal Savings Allowance before further Income Tax applies at your marginal rate.
What is the Personal Savings Allowance for P2P interest in 2026/27?
It is £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers, and £0 for additional-rate taxpayers, who must pay tax on all their savings interest, including P2P interest, from the first pound earned.
Can I offset losses from a defaulted P2P loan against tax?
Yes, through bad debt relief, which allows losses from loans written off as irrecoverable to be set against your P2P interest income, reducing the amount on which you are taxed. This relief is specific to P2P lending interest and cannot be used against unrelated income like your salary.
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Does an Innovative Finance ISA make P2P lending tax-free?
Yes, returns from P2P loans held within an eligible Innovative Finance ISA are completely free of Income Tax, using up part of your overall £20,000 annual ISA allowance for 2026/27. Not all P2P platforms or all loans on a platform are IFISA-eligible, so check before investing if this matters to you.
Do I need to complete a Self Assessment return for P2P income?
It depends on the amount and your circumstances. If your taxable P2P interest (after any bad debt relief) exceeds your Personal Savings Allowance and you do not already have it collected through your tax code, or you already file Self Assessment for other reasons, you will generally need to report it there.
Is P2P lending covered by the Financial Services Compensation Scheme?
No, in most cases. Unlike money in a bank or building society savings account, funds lent through P2P platforms are not typically protected by the FSCS in the same way, meaning your capital is genuinely at risk if borrowers default and cannot be recovered, beyond whatever specific protections the platform itself offers.
How do I know how much tax I owe on my P2P interest?
Most platforms issue an annual tax statement (sometimes called a certificate of interest) showing your gross interest received and any amounts written off as bad debt during the year, which gives you the figures needed to work out your net taxable interest for Self Assessment or checking your tax code.
Can I hold P2P lending in a Stocks and Shares ISA instead of an IFISA?
No, P2P loans are not eligible investments for a standard Stocks and Shares ISA. If you want to shelter P2P lending returns from tax within an ISA wrapper, you specifically need an Innovative Finance ISA, which is the only ISA type designed to hold this type of investment.
Does capital repaid from a P2P loan count as taxable income?
No, only the interest element of your P2P returns is taxable income. The repayment of your original capital (the amount you lent) is simply the return of your own money and is not itself subject to Income Tax, though a loss of capital through default may be relievable as described under bad debt relief.
Are P2P platform fees tax deductible?
Some platform fees charged directly against your interest may reduce the taxable amount reported on your annual statement, but fees are not usually something you separately deduct yourself. Check your platform statement, as most already show interest net of any such charges.
Disclaimer: This guide reflects the tax treatment of peer-to-peer lending in 2026/27. P2P lending is not covered by the Financial Services Compensation Scheme in the way bank savings are, and capital is at risk. This guide is for general information only and is not professional advice. Consult a qualified adviser and refer to gov.uk for current official guidance before relying on any treatment.
