Peer to peer ISAs, explained honestly.

A peer to peer ISA is the everyday name for an Innovative Finance ISA (IFISA), a type of ISA introduced by the UK government in April 2016. Instead of holding cash or stocks and shares, it holds peer-to-peer (P2P) loans. You lend your money, through an FCA-regulated online platform, to borrowers such as small businesses, property developers or individuals. They pay interest, and because the loans sit inside an ISA wrapper, that interest is free of UK income tax.

How does a peer to peer ISA work?

The mechanics are simpler than they sound. You open an IFISA with a provider, add money (up to your annual allowance), and that money is lent out to borrowers, either chosen by you or automatically spread across many loans. As borrowers repay, you receive your capital back plus interest, tax-free, which you can withdraw or reinvest.

Most providers focus on a particular kind of lending. Some lend against UK property with a legal charge as security; others fund small businesses, commercial property, or even education. The type of lending drives both the target return and the risk profile.

What are the risks?

This is the part the glossy adverts gloss over, so we'll be blunt. P2P lending is a high-risk investment:

• Borrowers can default. If a loan isn't repaid, you can lose some or all of that money.
• Platforms can fail. If the provider itself goes out of business, recovering your money can be slow and incomplete.
• No FSCS protection. Unlike cash in a bank, P2P lending is not covered by the Financial Services Compensation Scheme.
• Limited access. Your money is tied up in loans. You may not be able to withdraw quickly, especially if a secondary market dries up.

Who might it suit?

An IFISA is generally only worth considering for people who already have an emergency fund and diversified savings, who understand they could lose money, and who want to use their tax-free allowance on a higher-risk, income-focused investment. It is not a savings account and should never be confused with one.

Ready to see how the platforms stack up? Our provider comparison lays out target rates, minimums and security side by side, and our review methodology explains exactly how we assess each one.