One of the most common questions you’ll have when you first get started with P2P investing is:
what taxes do I need to pay and how do I pay them?
Sadly, like most types of investing, managing and paying taxes is no walk in the park: regulations keep changing, allowances vary depending on your marital status and the payment process is unique to every country. That’s why it’s very difficult to offer specific advice on paying taxes when it comes to P2P investing.
The best we can do is give you a bit of an overview and point you in the right direction – and that’s what we’ll try to do in this post.
How does the tax system vary from country to country?
Every country has a unique tax system with different allowances, restrictions and tax declaration systems. We’re not going to cover every European country’s tax system, but we can give a brief overview.
In Europe there are generally two different ways to tax P2P earnings: based on your level of income, and based on your capital gains. Some countries might do both, and some might tax you at different rates depending on how you make a return on your investments (we told you it’s complicated).
The UK, Denmark and Austria tax P2P earnings on an income tax level. However, Germany, Spain and Italy tax your P2P earnings on a capital level – so, the earnings are taxed as capital gains tax. It’s important to note that you will pay taxes depending on the country you reside in. Wherever your tax residence is – that’s where you will pay taxes on P2P gains. So if you have a company in Estonia or Malta but live in Germany, you will need to pay your taxes in Germany.
As we mentioned above, some countries tax your profit differently than the interest you make.
So if you sell your loans on the secondary market (capital gains tax), you will pay a different tax than the one you earn on your interest (wealth tax). Some countries also implement some interesting tax breaks. The UK offers an Innovative Finance ISA, which is a tax-advantaged account specifically for P2P earnings.
In Estonia, you can invest through a company and only pay taxes when you pay dividends, and in Portugal, you pay a 0% tax rate on the first 10 years you live there as a foreign resident. These are all interesting tax optimisation strategies that could work for you – although we recommend consulting an expert before packing your bags and booking the next ticket to Porto.
At Swaper, we offer investments to residents of most of the EEA countries.
How much tax would I need to pay?
There are two main ways to tax P2P earnings, but you’ll find that most European countries tax on interest earned (wealth tax). This means that most European citizens need to declare their P2P investment earnings even if it’s being reinvested and is not withdrawn. These tax rates vary from country to country: France, Sweden and Finland charge the highest in taxes with an over 30% tax rate, whereas most of the Eastern European countries like Poland and Romania charge less than 20%.
If you’re investing as a company, you will pay a lower tax rate. In Germany, for example, the personal rate is 25% for individual investors and goes down to 15% for companies. In the UK, you get a £1,000 personal allowance before getting taxed. If you do earn more than that, you pay according to your tax bracket. So, 20% if it’s the basic rate, 40% for the higher rate, and so on. You can also invest through the IFISA (the tax-advantaged account), which won’t tax you on your capital gains. However, not all peer to peer lending platforms offer IFISAs – we don’t offer one at Swaper.
Look up the wealth tax and capital gains tax in your country and then see if there are any allowances or tax-advantaged accounts for P2P investing. Type in “P2P investing + [your country]” in the local language and see what comes up. You’ll likely find resources and tips on how to pay taxes on investments.
Can I set off bad debt?
One of the advantages of peer to peer investing is that in some cases, you may be allowed to offset your losses against your taxes. These losses are from bad debt – borrowers who haven’t repaid their loan.
This, once again, does depend on your country. In the Netherlands, Estonia, Finland and Germany, you cannot offset your losses against your P2P gains – you can in Belgium, Switzerland, the UK and France. If you’re unsure, do a quick Google search in the language of the country and see what you find.
How do I pay my taxes?
You are responsible for your own taxes and will need to pay them yourself, usually through a yearly tax self-assessment. At Swaper, we’ve made it easy to gather all your information together and export it onto an Excel spreadsheet; simply head to My Investments > Account Statement and you’ll be able to see a breakdown of all your transactions and loan information.
You can then use these numbers on your self-assessment and pay the right amount of tax. If you invest in various P2P platforms, it can get quite complicated quickly so make sure you allocate enough time to do all your calculations.
Here are a few ways to optimise your P2P investing tax bill:
- Make sure you fully use all the tax allowances available in your country. This could be through tax-advantaged accounts, investing through a company or offsetting losses – these allowances are nearly always worth it.
- Consider setting up an account with your partner. In Germany, for example, couples can combine their tax allowances and make more money before paying taxes.
- Look into investing through a company. Although it’s best to seek expert advice on this, many countries such as the UK or Estonia allow you to set up a company relatively quickly and cheaply. You don’t need to call yourself a CEO and start hiring employees – but it’s a good option if you’re planning on investing a large sum of money into P2P investing or live in the higher rate tax band.
We hope this offers a good starting point for understanding how taxes work in the world of P2P investing. Yes, it may sound a little complicated and tiresome (except maybe for the spreadsheet nerds), but taking the time to learn the ins and outs of the tax system will allow you to maximise allowances and reduce your tax bill – which in the end means more money for you!
Disclaimer: The information contained on this website is not intended as, and shall not be understood or construed as, financial advice. We have done our best to ensure that the information provided on this website is accurate and provide valuable information.