Deduction of tax consultation

It would be a competitive advantage if other platforms were following the law as it's currently written. Since none appears to be actually following that, with HMRC's apparent agreement, the advantage doesn't currently exist.

I agree with you overall. Except for non-UK lenders I don't think it's actually a good idea to deduct tax from interest but the consultation is about how it should be done if it's to be done.

That's what the law currently says is supposed to be done: "where the interest is due to a lender who is resident outside the UK, the borrower (or the P2P platform) is required to deduct income tax at source from the interest for payment to HMRC, and to pay the interest to the lender net of tax", para 10 of the consultation document.

The tax treaties I've looked at, not many, have the origin of the income taxing first, then that being used to reduce the tax due in the country of residence. So they probably are subject to UK tax. Since they are subject to it, deducting at source seems like a potentially reasonable approach that will get them a corresponding tax deduction on their local bill.

I'm subject to Estonian income tax for loans made via Bondora to Estonian borrowers but the Estonian income tax rate for this happens to be zero, so I don't declare any foreign tax deducted on the foreign part of my UK tax return. Which means I end up paying full UK tax on it.


The current system for banks and building societies does not allow all of those who will have no tax to pay to get interest paid free of tax. Notably, it's only permitted for those whose total income, including much interest, is less than their personal allowance. As the helpsheet linked there says "If you live in the UK and your total income is less than £15,600 you may be eligible to receive your bank or building society interest without tax taken off". So those with an income above that but deductions that mean no tax is due would have the tax deducted anyway and have to reclaim it.

For me that would be a thousand or two Pounds of tax on interest to reclaim and I'm working on increasing that.

The setup that's most beneficial to tax payers is no deduction of interest for UK residents, then only those with tax due need to declare it to HMRC. The personal savings allowance should cut that number a fair bit from what it is today. For those with tax to pay, they get to have the money tax free until they tell HMRC. And no UK resident ends up having tax deducted that they have to reclaim later.

But it's not quite true that there's a need to declare it to HMRC. I think it's later this year that HMRC will start to use the quarterly savings interest reports that those deducting the ta x have to file to pre-fill tax returns and they may also start adjusting PAYE tax codes using the information after that. So no UK resident might then have to even tell HMRC about domestic untaxed or taxed interest because HMRC will tell them and they would only need to tell HMRC if there's a problem or relief to claim. With the computers taking care of most of this that's a significant avoidance of the need to push paper around.

Does HMRC receive any information regarding interest payments at present from a) banks or b) P2P lenders?

Do thet rely on honesty (and the threat of prosecution/fines) for higher rate tax payers on PAYE salaries to declare interest incomes?

This tax year will be the first that I have any significant income from savings/investments outside of an ISA. I PAYE so will need to contact HMRC to declare. I hope the proposed IF-ISAs become available soon...

According to the current legislation, all providers of "Yearly" loans (loans of one year or longer) should deduct Income Tax at source.  MoneyThing's loans are all "Short" loans, which would exempt them from needing to do this, thus giving lenders a greater compounding opportunity.  However, HMRC appears to be advising P2P companies to ignore the current legislation, and none of them is deducting Income Tax at source, regardless of loan duration.

All P2P companies do not collect short interest. MoneyThing does, on all of its loans that I have seen. So if current law was applied, MoneyThing would have no obligation to deduct tax from interest for UK lenders.

Other firms may also have a competitive advantage under current law, like those lending from and to consumers and sole traders rather than businesses, which have a similar lack of obligation to deduct tax. Platforms lending to businesses do have an obligation to deduct if the lenders are consumers. Paragraph 10 of the consultation gives the full list of rules.

For lenders this means that the platforms that deduct tax would be paying full compounding interest, while those with tax deducted won't be. Consumers who have no obligation to pay tax but income above the personal allowance would also avoid the need to overpay then reclaim tax from their activities with any deducting platforms.

The consultation has two relevant proposals:

1. Removing the difference based on borrower type.
2. Removing the difference based on whether the interest is short or not.

This discussion is related to proposal 2.

At present it appears that HMRC has told providers that it's OK to ignore the current law and wait for P2P-specific law that this consultation is about.