If you are a UK taxpayer, you will not have to pay tax on your lottery winnings. Whether you win a small sum or a jackpot, the entire amount is yours to keep. This applies to prizes won from the National Lottery, EuroMillions, scratch cards or any other legal lottery.
When Taxes Do Apply to Lottery Winnings
While you do not pay tax on the winnings themselves, what you do with the money can lead to tax obligations.
1. Income Tax on Interest and Investments
If you place your winnings into a savings account, you may need to pay tax on any interest earned. You only pay tax on interest that exceeds your Personal Savings Allowance:
- Basic-rate taxpayers can have up to £1,000 tax-free interest
- Higher-rate taxpayers can have up to £500 tax-free interest
- Additional-rate taxpayers have no tax-free allowance
If you use your winnings to invest in property or stocks, any income generated (such as rental income) will be subject to Income Tax.
2. Inheritance Tax (IHT)
Lottery winnings become part of your estate once they are in your name. When you pass away, your estate may be subject to Inheritance Tax if its total value exceeds the following thresholds:
- £325,000 for individuals
- £650,000 for couples
Above these amounts, HMRC charges Inheritance Tax at 40%. Spouses and civil partners are exempt but other beneficiaries, such as children or friends, may need to pay.
3. Gift Tax
If you want to share your winnings with loved ones, you can only give up to £3,000 per year tax-free. Anything above this amount may be subject to Inheritance Tax if you pass away within 7 years of making the gift.
HMRC uses a sliding scale to determine the tax rate of gifts within 7 years of your death:
- 40% for between 0 and 3 years
- 32% for between 3 and 4 years
- 24% for between 4 and 5 years
- 16% for between 5 and 6 years
- 8% for between 6 and 7 years
If the recipient sells the gifted money or assets for a profit, they may also need to pay Capital Gains Tax.
Donating Your Winnings to Charity
If you choose to donate some of your winnings to charity, there is no tax obligation. Donations to registered charities are tax-free and can sometimes reduce your overall tax liability.
How the Lottery Funds are Used
Ever wondered where the money from lottery ticket sales goes? Here’s a breakdown:
- 50% is returned to players as winnings
- 28% goes to goods causes, including health, education and sports
- 12% is paid in Lottery Duty
- 5% is earned by lottery retailers
- 4% covers operational costs
- 1% is distributed as profits to investors
Contact Us
We are not just accountants; we are Chartered Accountants with one of the most reputable and premium accounting bodies. We are registered and regulated by ACCA; so you can rest assured that you are in good hands. Knowing this, don’t hesitate to get in touch with us if you require assistance: Pi Accountancy | Contact Us