The first £1,000 of peer-to-peer earnings will be tax free

Following the announcement of the 2015 Budget, the new tax-free savings allowance will also apply to peer-to-peer lending and earnings.

The Government has confirmed that from April 2016 the first £1,000 of peer-to-peer earnings for many workers will not be subjected to tax, though a £500 restriction will be in place for higher rate taxpayers.

Top-rate taxpayers are ineligible and will still incur the typical 45 per cent tax rate on all their earnings.

At the Budget announcement, Chancellor George Osborne made it clear that non-Isa cash savings would benefit from tax relief; however, it was not clear as to whether or not the reforms would include lending transactions between peers, where investors lend money to numerous individuals through a funding platform.

Zopa, a leading authority in the sector, says it pays an annual return of 5.1 per cent on loans lasting up to five years, with interest paid as and when borrowers repay their loans.

With such a high interest rate available, peer-to-peer lending outperforms returns on cash savings products offered by most banks and building societies’ savings accounts.

Furthermore, peer-to-peer lending does not involve the same conditions as savings or current accounts such as a minimum deposit or account fees being charged.

According to Zopa, because the majority of people usually put approximately £6,000 in peer-to-peer, the type of lending has essentially become tax-free for many savers.

However, if a peer-to-peer lender also earns interest at their bank or building society, this will also count as part of their tax-free allowance.