While you’re looking for a peer to peer funding platform to use, there are plenty of things to consider. Bear in mind the following when making your decision:
- Focus on the platform, rather than the loan. P2P lending is one of the less time-consuming investment options. If you’re looking for good returns for minimum effort, opt for platforms that take care of your investments behind the scenes.
- Diversify your investment. Just as putting all your eggs in one basket leaves you vulnerable to a defaulting borrower, the same goes for the number of platforms in which you invest. If you split your savings across several platforms, you reduce your risk if one of the platforms goes bust. That said, it can be hard to keep track of your funds when they’re spread across too many platforms, so investors recommend sticking to a maximum of five.
- Look for an easy exit. Some platforms make it easy for lenders to withdraw their money, taking care of the rest. They’ll reallocate your loans to other lenders behind the scenes, meaning you get your money back quickly without any hassle.
How is P2P interest taxed?
For tax purposes, HMRC views most money earned through peer to peer lending as income, which is taxable. For most lenders, they won’t pay any tax due to the personal savings allowance, which allows basic rate (20% in 2020) taxpayers to earn up to ?1,000 of tax-free interest.
Higher rate taxpayers (40% in 2020) have access to the same scheme but have a lower tax-free limit of ?500. Any interest earned above these thresholds is liable to tax, which you must pay at your highest marginal rate of tax. Additional rate taxpayers are not eligible for a personal savings allowance, so anybody who earns more than ?150,000 per year must pay tax on all their savings. Continue reading “As a lender can I hold my P2P loans in an ISA?”