What is peer-to-peer lending?

Peer-to-peer (P2P) lending lets you lend money directly to individuals or businesses through an online platform, cutting out the bank. In return, you earn interest — typically higher than a savings account. The platform manages the process, spreading your money across multiple borrowers to reduce risk. P2P is not protected by the FSCS.

Is peer-to-peer lending safe UK?

P2P lending carries more risk than a savings account. Your capital is at risk — if borrowers default, you could lose money. Platforms mitigate this with credit checks, provision funds, and diversification, but there's no FSCS protection. Some platforms have failed. It's best treated as a higher-risk part of your portfolio.

Do you pay tax on peer-to-peer lending UK?

Yes — interest earned from P2P lending is taxable as savings income and counts towards your Personal Savings Allowance (£1,000 basic rate, £500 higher rate). If held in an Innovative Finance ISA (IFISA), interest is tax-free. You can also offset losses against gains if borrowers default.

What returns can I expect from P2P lending?

Returns vary by platform and risk level, typically ranging from 4% to 10%+ per year. Higher-risk loans to individuals or small businesses pay more but have higher default rates. After defaults and fees, real returns of 4%–7% are more realistic.

Peer-to-Peer Lending Guide UK — Rates, Risks, and Platforms | PocketWise

Peer-to-peer lending offers higher returns than savings accounts — but with added risk that your capital isn’t protected. Here’s how it works in the UK, which platforms to consider, and what to watch out for.

How P2P Lending Works

Step	What happens
1	You deposit money on a P2P platform
2	The platform assesses borrowers and assigns risk ratings
3	Your money is lent to borrowers (individuals or businesses)
4	Borrowers repay the loan plus interest over time
5	You receive interest payments (monthly or at maturity)
6	The platform takes a fee from the borrower

Your money is typically spread across many different loans to reduce the impact of any single default.

P2P Returns vs Savings Accounts

Product	Typical return	Capital at risk?	FSCS protected?
Easy access savings	3%–5%	No	Yes (up to £85,000)
Fixed rate bond	4%–5%	No	Yes (up to £85,000)
Cash ISA	3%–5%	No	Yes (up to £85,000)
P2P lending	4%–10%	Yes	No

UK P2P Platforms

Platform	Focus	Typical returns	IFISA available	Min investment
Kuflink	Property-backed loans	5%–7.5%	Yes	£100
CrowdProperty	Property development	6%–8%	Yes	£500
Assetz Exchange	Property-backed	4%–6%	Yes	£1
Lendwise	Professional and postgraduate loans	4%–6%	Yes	£10
Folk2Folk	Secured business/property loans	5%–7.5%	Yes	£20,000

Note: The P2P market has consolidated significantly. Zopa, Funding Circle (retail), and RateSetter have closed their P2P platforms to new retail investors.

Types of P2P Lending

Type	What you’re lending for	Typical return	Risk level
Consumer loans	Personal loans to individuals	4%–7%	Medium
Business loans	Lending to small businesses	5%–10%	Medium–high
Property (bridging)	Short-term property financing	5%–8%	Medium
Property (development)	Funding building projects	6%–10%	Higher
Invoice finance	Advancing money against unpaid invoices	4%–7%	Medium

Risks of P2P Lending

Risk	Detail
Borrower default	Borrowers may not repay — you could lose some or all capital
No FSCS protection	Unlike bank savings, P2P isn’t covered by the £85,000 guarantee
Platform failure	If the platform goes bust, recovering your money can be slow and uncertain
Illiquidity	Your money is locked into loan terms — early exit may not be possible or may come at a cost
Economic downturns	Defaults increase during recessions
Interest rate risk	Better savings rates may make P2P less attractive relative to its risk

Protections Platforms Offer

Protection	How it works
Provision funds	Some platforms set aside a reserve to cover defaults (not guaranteed)
Credit scoring	Borrowers are assessed before being listed
Diversification	Your money is spread across many loans
Security / collateral	Property-backed loans are secured against physical assets
Wind-down plans	FCA requires platforms to have plans for an orderly closure

Tax on P2P Lending

Situation	Tax treatment
Interest earned outside ISA	Taxed as savings income — counts towards your PSA
Interest earned in an IFISA	Tax-free
Losses from defaults (outside ISA)	Can be offset against P2P interest using the peer-to-peer loss relief
Losses from defaults (inside IFISA)	No tax relief — losses reduce your tax-free return

Innovative Finance ISA (IFISA)

Feature	Detail
Annual allowance	Part of the £20,000 ISA allowance
Tax-free interest	Yes — all interest earned is tax-free
FSCS protection	No
Capital at risk	Yes
Transfer from Cash ISA	Possible on some platforms

How to Get Started

Assess your risk tolerance — P2P should only be a portion of your savings, not your emergency fund
Research platforms — check FCA authorisation, track record, default rates, and how loans are secured
Consider an IFISA — if you’re going to do P2P, doing it tax-free makes sense
Diversify — spread across multiple platforms and loan types
Start small — test with a small amount before committing more
Understand the lock-in — know how long your money is tied up

P2P vs Other Investments

Factor	P2P Lending	Savings Account	Stocks & Shares ISA	Bonds/Gilts
Return	4%–10%	3%–5%	5%–10% (long-term average)	3%–5%
Capital at risk	Yes	No	Yes	Low (if held to maturity)
FSCS protected	No	Yes	Up to £85k (platform)	Some
Liquidity	Low–medium	High	High	Medium
Volatility	Low (returns predictable if no defaults)	None	High	Low–medium
Tax-free option	IFISA	Cash ISA	S&S ISA	ISA/SIPP

Summary

Factor	Detail
Returns	Higher than savings — typically 4%–10%
Risk	Medium to high — capital is at risk
FSCS	Not protected
Tax	Counts towards PSA, or use an IFISA for tax-free
Best for	Experienced investors diversifying beyond mainstream options
Not for	Your emergency fund or money you can’t afford to lose