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People are generally fed up with banks. For years, they’ve paid miserably low interest and at the same time are becoming stingy with their lending. Meanwhile, there are people that want to earn by lending and others that want to borrow but can’t. So, ta-dah! The Peer-to-Peer (P2P) lending industry was born and has gotten quite big, quite quickly.
What exactly is a P2P company?
First of all, P2P? Yep, that’s the official short form of peer-to-peer. These companies deal only with lenders and borrowers. This is all they do. They’re regulated financial companies but they're not banks. Since they’re “new” to the lending game they offer a very user-friendly online service – you can select your account and sign-up in less time than it takes to post a selfie.
Tell me how they work
When you deposit into a P2P account your money is used towards loans to individuals and companies. In return you're paid interest.
How much interest are we talking?
It depends which P2P company you use and how long you lend for. Ratesetter.com pay 3.8% on a 1-year loan and 4.8% on a 5-year loan.
I’m a bit sceptical. Are P2P’s safe?
They sit at the ‘lower risk’ end of the investment spectrum. But, unlike lending your cash to a bank, you’re not protected by the Financial Services Compensation Scheme (FSCS). Instead, the P2P platforms set up their own compensation schemes. They put money aside to cover any loans that go bad. They also have strict rules and checks on who they lend to, which reduces the risk of bad loans.
Will I be taxed on the interest I earn?
Any interest is treated as income and gets taxed as income. HOWEVER, the government launched a personal saving allowance (PSA), which allows basic tax payers to earn £1,000 interest a year tax-free and higher-rate tax payers £500 a year. If you’re an additional-rate tax payer, I’m afraid there’s no PSA for you.
If you’ve hit your yearly PSA limit, there's an ISA option which means you can earn interest without paying tax. It’s called the Innovative Finance ISA.
Help! What’s my income tax bracket?
|Your Income||Band Name||Tax Rate|
|Up to £11,850||Personal Allowance*||0%|
|£11,851 to £46,350||Basic rate||20%|
|£46,351 to £150,000||Higher rate||40%|
|Over £150,000||Additional rate||45%|
*If you earn over £123,000 a year you don't get a Personal Allowance so your tax bracket starts at 20% not 0%.