Do you pay tax on the savings you earn for peer-to-peer lending?
Yes, when you lend out your money through a peer-to-peer lending site, they will send you an annual statement of interest earned which you will need to declare through your self-assessment tax return. You will be required to pay tax on the interest you make based on your income band whether it’s 20%, 40% or 45%.
When you lend your money through a peer to peer website, you are lending your money to a pool of individuals or businesses in order to minimize the risk of bad debt. The group of individuals will make their repayments on a monthly basis and you will receive this payment as income in the form of a fixed interest rate. You can decide to withdraw this money each month or continue to relend it and continue to make interest on your money.
Savings will be tax free from April 2015
One thing to be aware of is that you are taxed on the interest rate that you have been quoted. For example, if you are quoted a return of 6% but due to bad debt you receive a rate of 4%, you will be taxed on a rate of 6%. This is not ideal for the person lending the money and following much debate; the Government announced in Autumn 2014 that lenders will not be charged income tax on savings starting from April 2015. This is a very positive outcome for anyone looking to do peer-to-peer lending as it means an even greater return will be available.