What is an innovative finance Isa, or Ifisa?
An innovative finance Isa - sometimes called an Ifisa - is an Isa that contains peer-to-peer loans instead of cash (as in a cash Isa) or stocks and shares (as in an investment Isa).
Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses, or property developers.
And because you're cutting out a bank by investing your money through an online portal - known as peer-to-peer lenders - you tend to earn higher rates of interest than a traditional savings account.
Since April 2016, peer-to-peer lenders have been able to offer a tax-free Isa account. This guide explains who currently offers innovative finance Isas, how they work - and whether you really need one.
Innovative finance Ifisas - who offers them?
There are a number of innovative finance Isas currently available on the market, offering you the opportunity to lend your money to a mixture of individuals, businesses and infrastructure projects.
The table below shows all of the innovative finance Isas currently available, the types of investment they involve, the minimum amount you can put in, and the typical range of returns you might expect.
This table is solely designed to help you explore your options, and is not a recommendation or endorsement of any of the named lenders. It is updated every three months, so the rates stated in the table are subject to change.
Some of companies listed in this table are small and untested. If you are new to peer-to-peer lending, we would generally recommend going with one of the bigger, longer-standing players until the others have been able to stand the test of time.
Read our reviews of the four most-used lending platforms here:
- Read our review of Funding Circle
- Read our review of RateSetter
- Read our review of Zopa
- Read our review of Wellesley & Co
How does my innovative finance Ifisa allowance work?
In the 2018-19 tax year, you can save up to £20,000 into an Isa. This can be a mixture of cash, stocks and shares or an innovative finance Isa.
So, to use up your allowance, you could put:
- £10,000 into a cash Isa
- £5,000 into a stocks and shares Isa
- £5,000 into an innovative finance Isa
How do transfers into innovative finance Ifisas work?
You can only open one new innovative finance Isa with one single provider each tax year.
However, you can transfer any money that's already within a cash Isa or stocks and shares Isa to an innovative finance Isa offered by a peer-to-peer provider.
Here's what you need to do:
- If you want to transfer your cash or stocks and shares Isa savings from the current tax year, you have to transfer the full amount;
- But you can transfer as much or as little as you like from older Isas you've held in previous years, without affecting this year's £20,000 Isa allowance;
- To transfer your your Isa, you should complete a transfer form with the innovative finance Isa provider you want to switch to;
- Don't withdraw your money out of your other Isas to transfer, as it could impact on your current Isa allowance;
- Transfers take place in cash - so if you hold stocks and shares Isas, all of your investments would be sold and the cash would be used to invest in peer-to-peer loans.
- Transfers to innovative finance Isas should take no more than 30 working days.
Can I transfer existing peer-to-peer loans to an Ifisa?
As it stands, you will not be able to simply transfer your existing peer-to-peer investments into an innovative finance Isa when the site you invest with launches one.
Through a quirk in regulation, you would have to sell them – incurring any early exit charges that apply – and then make those loans again at whatever new rate applies at the time.
This means you can’t just make non-Isa loans now and bring them into your Ifisa when you open one.
Do I need an Innovative Finance Ifisa?
Basic-rate and higher-rate taxpayers can currently earn interest without paying any tax, under the Personal Savings Allowance.
The first £1,000 of interest earned by basic-rate taxpayers is paid tax free, while higher-rate taxpayers can earn £500 free of tax.
The Personal Savings Allowance applies to interest earned on peer-to-peer lending.
If you had invested, for example, in a peer-to-peer lending account offering a predicted return of 4.3%, you'd need to have invested more than £23,000 in order to use up your Personal Savings Allowance for the year, if you had no other sources of savings interest.
Whether or not you need an innovative finance Isa will depend on the rate of tax you currently pay, how much you are prepared to invest and the rate of return you expect to receive.
But think carefully about the level of risk that you are taking with peer-to-peer lending - and don't simply choose the company because it offers an Isa.