New ISA Rules Let Savers Make Money From Lending

Savers are going to be handed the chance to boost their ISA pots by lending money without paying any tax on the interest they earn.

Chancellor George Osborne seems not content with overhauling pensions, but now he is taking his tinkering with ISAs further as well.

Earlier in the year, the ISA investment limit was lifted to £15,000.

Now, he has launched a consultation about extending ISA rules to cover peer-to-peer lending.

Peer-to-peer lending is where a group of investors club together on an investment platform to take pitches from borrowers.

Some are for personal loans, others are for businesses.

Peer-to-peer lending rates

Typical interest rates offer returns of between 3% and 10% a year over three to five year loans.

The returns from peer-to-peer lending are currently taxed as income, but wrapping them in an ISA will make them tax-free.

Financial Secretary to the Treasury David Gauke said: “This is part of our plan to offer savers more choice and flexibility over how they can make their savings work for them.

“Reforming ISAs and pensions is about giving savers control over their money to allow them to increase their money and take it and spend it when they want.”

Full details of the ISA consultation are on the government web site

One of Britain’s largest peer-to-peer lenders RateSetter expects to see borrowing surge from £2 billion to £45 billion within a few years as a result of opening the market to ISA investors.

“Peer-to-peer lending offers high rates of interest unavailable elsewhere, and if the returns are free from tax inside an ISA this will be an excellent opportunity for savers to make more of their money,” said the firm’s CEO Rhydian Lewis.

Shock for banks

A survey earlier this year predicts 66% of ISA savers will try out becoming a lender when ISA rules change.

The government has already held talks with peer-to-peer lenders about offering their services within ISAs

Another peer-to-peer lender Zopa also welcomed the new measures.

CEO Giles Andrew said: “This will be a savings game changer for many families and a major shake-up of the banking sector.

“Whatever the outcome, savers could earn triple the rates they are receiving from bank accounts.”

Looking at new government measures to upgrade pensions and ISAs, a thread running through the policy seems to be switching saving and investment options away from banks and other monolithic financial providers to newer alternatives like crowdfunding and peer-to-peer lending.