The UK government has launched a consultation into how investors will be taxed on peer-to-peer lending, with closing comments released in September.

At the moment, the legislation regarding income tax paid on peer-to-peer investments is somewhat confused. Not only is it complicate for the borrower, the platform and the lender.

The consultation reads: “Comments are sought on the proposed changes to the obligations of peer-to-peer platforms and borrowers of peer-to-peer loans to deduct income tax at source from interest paid,” and recommends that peer-to-peer platforms, lenders of peer-to-peer loans, borrowers of peer-peer loans, representative bodies and tax professionals all read the report.

The government said it supports a more competitive financial sector, where new banks, P2P platforms and other forms of financing can have a chance of success against traditional loans platforms, such as high street and online banks.

However, it now wants to start charging income tax to investors at source on interest payments made from P2P loans, starting April 2017, rather than allowing individuals to be tax exempt and companies to pay tax via the P2P platform.

The current rules mean lenders will have to pay tax on some investments, but not others, making it even more complicated for all parties involved.

The proposals include allowing personal investors to take advantage of their Personal Savings Allowance (PSA), which is £1000 for basic rate taxpayers and up to £500 for higher rate taxpayers and it will apply to the status of the lender rather than the borrower.

“Broadly, income tax would be deducted at source if the lender was an individual, or was based overseas,” the proposal reads. “Under this approach the person responsible for deducting any tax from the payment will only have to keep track of the status of the lender, and will not have to consider the identity of the borrower for each loan part that the lender has invested in.”