Following the introduction of the Innovative Finance ISA (IFISA) in April 2016, IFISA interest and capital gains will be tax-free.
Outside of the IFISA, tax has to be paid on all interest received via peer to peer lending platforms like RateSetter at your marginal tax rate. In effect, any interest received will be added to your total taxable income, and taxed accordingly. You can get more information on your personal tax allowance here: https://www.gov.uk/apply-tax-free-interest-on-savings/how-much-tax-you-pay’
Outside of the IFISA, a £10,000 portfolio of peer to peer loans yielding 10% interest will yield a gross interest return of £1,000 per annum. A basic rate taxpayer would be expected to complete a tax return and to pay tax at 20% (£200). A higher rate taxpayer would be expected to pay 40% (£400) and an additional rate taxpayer would be expected to pay 45% (£450).
With the Innovative Finance ISA peer to peer income and gains will be ring-fenced in a tax-free ‘pot’. In this example, there will be no tax to be paid on the £1,000 interest received.
Note: the Personal Savings Allowance (PSA) introduced in April 2016 will allow lower rate taxpayers to receive their first £1,000 of interest tax free regardless of whether it is earned through an ISA. This number is reduced to £500 for higher rate taxpayers.