Interest from peer to peer (P2P) lending is taxed in the same way as bank interest, so the Personal Allowance, the starting rate for savings and the Personal Savings Allowance can all cover it. Loans held in an Innovative Finance ISA are completely tax free. Outside an ISA, when a P2P loan becomes irrecoverable, Chapter 1A of Part 8 of the Income Tax Act 2007 lets you deduct the lost capital from your other P2P interest: automatically within the same platform, by claim across platforms, and carried forward for up to four years.

How is peer to peer interest taxed?

HMRC’s guidance states that interest from P2P loans is taxable in the same way as any other interest. It may be paid with or without tax deducted; if it is paid gross, you must tell HMRC about it and pay any tax due. Because it is savings income, it sits in the savings slice of your income:

  • any unused Personal Allowance covers it first;
  • the starting rate for savings of up to £5,000 is available if your other taxable income is below £17,570;
  • the Personal Savings Allowance then covers £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nothing for additional rate taxpayers.

Interest above those allowances is taxed at 20%, 40% or 45% in 2026 to 2027. The savings rates rise to 22%, 42% and 47% from 6 April 2027, which makes the loss relief described below worth more. The detail is in tax on savings interest and the Personal Savings Allowance and how savings and dividend income stack.

What does an Innovative Finance ISA change?

An Innovative Finance ISA (IFISA) is one of the four types of ISA. It can hold P2P loans, crowdfunding debentures, certain funds and cryptoasset exchange traded notes. Interest inside it is tax free and does not go on a tax return. The overall ISA subscription limit for 2026 to 2027 is £20,000, which can be split across ISA types. You cannot move loans you already hold into an IFISA; only new subscriptions count. See ISA tax rules for subscriptions and transfers.

The trade off is that bad debt relief is not available inside the wrapper. HMRC’s Savings and Investment Manual at SAIM12040 explains that a loan only qualifies for the relief if the lender is subject to UK income tax on the interest, and a loan held in an ISA is not.

Which bad loans qualify for relief?

SAIM12030 lists the conditions. All must be met:

  1. You are the legal lender. You would be taxable on the interest. Holdings through a fund, partnership or other transparent structure do not qualify, but loans held by a nominee or bare trustee are treated as yours (SAIM12070).
  2. The platform is regulated. The loan must be made through an operator with Financial Conduct Authority permission under Part 4A of the Financial Services and Markets Act 2000 to operate an electronic system in relation to lending.
  3. The principal became irrecoverable on or after 6 April 2015.
  4. It is a “peer to peer loan” under section 412I ITA 2007. It is made on commercial terms and is not part of a scheme to obtain a tax advantage.

“Irrecoverable” means there is no reasonable prospect of recovery, which is not the same as late payment (SAIM12050). The platform will usually decide and tell you. Two shortcuts help lenders: a secured loan can be treated as irrecoverable as if the security did not exist, and a loan to a borrower in liquidation, administration, receivership or bankruptcy can be treated as irrecoverable as if those recovery procedures were not available.

How is the relief given?

The relief is a deduction from P2P interest only. It cannot be set against bank interest, dividends, earnings or any other income. It is used in a fixed order:

  1. Same platform, same year. Under section 412A, the irrecoverable amount is deducted from interest on your other loans through the same platform in the tax year it went bad. For losses from 6 April 2016 this happens without a claim.
  2. Other platforms, same year. Any excess can be set against P2P interest from other platforms in the same year, by claim in a tax return (section 412B).
  3. Carry forward. Anything still unused can be claimed against P2P interest from any platform in the four following tax years, earliest year first (section 412C).

The amount of relief is the principal outstanding, after deducting repayments already received (SAIM12110). If you bought the loan from another lender, it is the lower of what you paid less repayments since, and the principal outstanding when you bought it less repayments since.

Reporting it

HMRC’s guidance says P2P interest goes on the SA101 Additional information pages under other UK income: box 3 for gross interest less bad debt relief from all platforms, box 1 for net interest less relief, and box 2 for the tax deducted. Relief carried forward is not entered on the return, but you should keep records to support a later claim. If you do not file a return, you only declare P2P interest net of same platform bad debts, but cross platform and carry forward claims can only be made through a tax return; see who needs to file a tax return.

How does this work in practice?

Illustration only. Priya is a basic rate taxpayer who lends through platforms A and B. In 2026 to 2027 she receives £900 of interest through A and £600 through B. A £2,000 loan on platform A, on which £400 of principal had been repaid, is confirmed irrecoverable. Her relief is £1,600.

  • Same platform: £900 of A interest is reduced to nil automatically, using £900 of relief.
  • Other platform: she claims £600 against the B interest, reducing it to nil.
  • Carry forward: the remaining £100 is carried into 2027 to 2028 against any P2P interest.

Her taxable P2P interest for 2026 to 2027 is nil, leaving her full £1,000 Personal Savings Allowance free for bank interest.

What if a written off loan is later repaid?

SAIM12200 explains that a later recovery is taxed as P2P interest in the year it is received. The amount taxed is the lower of the principal recovered and the relief you were given. If Priya later recovers £300 of the £1,600, that £300 is P2P interest in the year it arrives.

Can a P2P loss be a capital loss instead?

Usually not. SAIM12210 notes that some P2P loans, such as assigned loans and loans to traders, historically qualified for capital loss relief. For loans that became irrecoverable on or after 6 April 2016, section 2(3) TCGA 1992 gives the income tax relief priority, so the capital loss is not available where the income tax relief applies. A capital loss may still be possible where the income tax conditions are not met, or for any part of a loss above the income tax relief.

What mistakes are common?

  • Claiming for late payers. Relief needs no reasonable prospect of recovery, not just arrears.
  • Offsetting against other income. P2P losses only reduce P2P interest, never salary, pension or bank interest.
  • Losing the carry forward. Unused relief lasts four years and needs a tax return claim; track it yourself.
  • Expecting relief inside an IFISA. Tax free interest means no relief for losses.
  • Forgetting recoveries. Money recovered on a relieved loan is taxable interest.
  • Ignoring gross interest. Where no tax is deducted, you must tell HMRC if tax is due; see registering for Self Assessment.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.