Savers are a step closer to being able to earn a tax-free income from peer-to-peer (P2P) lending after the Government today launched a consultation on how to include this form of lending in NISAs.

Chancellor George Osborne first announced plans to allow P2P loans to be held in NISAs in the Budget, as part of an overhaul of NISAs that included increasing the annual amount that can be put away tax-free to £15,000 from 1 July 2014 (see's Top Cash NISAs and Stocks and Shares NISAs guides for the best buys).

Financial Secretary to the Treasury David Gauke says: "P2P lending is an exciting, innovative new sector and it's right that investors who want to lend money via P2P platforms should be able to hold these loans in their ISA alongside more traditional investments."

The Government has today launched a consultation into how best to implement these changes, including asking whether P2P loans should be included in existing stocks and shares NISAs, or whether there should be a new third type of NISA which they could come under.

The consultation will close on 12 December and the Government will then look at amending legislation so P2P lending can be included in NISAs.

What is P2P lending?

P2P lenders act as middlemen by matching people who have some money to invest with people or small businesses who want to borrow it (see's Peer-to-Peer Lending guide for more information on how this works).

The potential returns on offer from the fledgling industry can often be much higher than those on offer with traditional savings accounts, although this type of investment does not have the protection of the Financial Services Compensation Scheme (FSCS), which compensates savers by up to £85,000 if their bank or building society goes bust.

At the moment, the interest that lenders earn from lending money via P2P platforms is taxable, but once P2P loans can be held in NISAs then it will be possible to earn interest completely tax free.