Personal Savings Allowance and direct lending

Spring is in the air and the government’s red case has been opened to reveal its budget gems. This is when we all look over our finances and see where the government has given some added value or shaved off from another area.

This year saw on one hand the government announce the more favourable NS&I three-year fixed rate bond at 2.2% p.a. on deposits up to £3000; and on the other-hand reduce the tax-free dividend allowance to shareholders from £5000 to £3000 by this time next year.

One area that could be a “win-win” from the Chancellor’s red case was the new Personal Savings Allowance (PSA) – a new mnemonic to add to our littered language.  The PSA will apply to up to £1000 of a basic rate taxpayer’s savings income and up to £500 of a higher rate taxpayer’s savings income each year. This is over and beyond the ISA allowances.

So, if you already have an ISA, and now are looking to fill your PSA why not consider a P2P (or direct lending option) to benefit from this tax break.

Peer to Peer (P2P), for those uninitiated, simply works by matching borrowers who want a loan with lenders who have cash direct. Normally any money lent is split up and lent out to several different borrowers, thereby reducing risk. It is an option to compete with the government’s savings sweetener of the NS&I three-year fixed bond at 2.2 p.a.

Many P2P lenders (direct lenders) can enable clients to target rates such as 8% gross p.a., with a diversified portfolio, which if you look at as both types of taxpayer it could be a great way to use your PSA. For instance:

  • A basic rate taxpayer could invest £12500 and achieve the target of £1000 tax free allowance p.a.
  • A higher rate taxpayer could invest £6250 and achieve the target of £500 tax free allowance p.a.

You would only use a small part of your PSA with the NS&I 2.2% p.a. bond even at the max of £3,000 (£66).

So, for those less experienced in P2P (direct lending) you may feel it a great match for your PSA.

*Warning: nothing in this article should be construed as advice. Your capital is at risk

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