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Do you need to pay tax on lottery winnings?

  • 4 min read
  • Last updated 20 Sep 2022

Good question. If you’re wondering if you have to pay tax on lottery winnings then guess what, you’ve come to the right place! While lottery winnings aren’t taxable, you may be subject to taxes once you’ve deposited the funds or if you give any winnings as a gift. Let’s get into it.

Is the lottery tax free?

The simple answer is yes. Phew, that was easy. If you’re a UK tax resident, you’re exempt from paying the following taxes on your lottery winnings:

Rather than an income, participating in the lottery counts as gambling in the UK according to HMRC. So if you’re lucky enough to win, rest assured that your winnings are tax-free. It doesn’t matter how much you win or what game you play.

Tax on deposited funds

Although you don’t have to pay taxes on your winnings, there are a number of things to keep in mind once the money has been sent to you. If your money is earning interest in the bank, you’ll be charged Income Tax on the interest from your savings.

You’ll also have to pay Income Tax on any investments you make with the money that earn you an income. For example, let’s say you purchase a buy-to-let property with the winnings and now you’re earning rent. You’ll have to pay Income Tax on your rent earnings if you make more than £12,570 in overall earnings in one tax year, whether it’s from rent, your job, or any other stream of income. This threshold is known as the Personal Allowance.

Lottery winnings and Inheritance Tax

If you win the lottery, the money you win becomes part of your estate. That means that if you pass away, whoever inherits your estate will have to pay Inheritance Tax (IHT) on it. Money, property, and assets can all make up your estate.

Inheritance Tax is currently taxed at an incredibly high rate of 40%. However, you’re only taxed on anything over the £325,000 threshold. This threshold is known as the Inheritance Tax Allowance.

This means that if your estate’s value is lower than this amount, whoever inherits it won’t need to pay tax on it. However, they’ll still need to declare it to HMRC.

Your spouse or civil partner doesn’t have to pay Inheritance Tax on anything you leave them, but your children or other family members and friends will.

Lottery winnings and Gift Tax

Gifts from winnings are subject to IHT. If you would like to gift some of your winnings to others but don’t want to pay Inheritance Tax on it, you’ll have to give the gift:

  • More than 7 years before you die
  • To your spouse or civil partner 
  • Within your annual allowance of £3,000

Annual allowance? Yep, you can only gift up to £3,000 every tax year without being taxed IHT. The good news is, you can carry over one year’s allowance to the next tax year, but only up to a maximum of £6,000. 

If you die within 7 years of giving a gift, HMRC use something called a sliding scale to calculate how much tax the person who inherited your estate or received a part of it as a gift, would pay. 

Number of years between giving the gift and you passing awayRate of Inheritance Tax to be paid
0-340%
3-432%
4-524%
5-616%
6-78%
7+0%

Other tax free gifts

You can give up to £250 per tax year to anyone without them being subject to IHT. As long as they didn’t receive any gifts from your annual £3,000 allowance then this gift is tax-free. 

Ever wish that when you got married, someone would’ve gifted you lots and lots of money instead of the useless toaster you now have 2 of? Be thankful for the toasters because, shockingly, not all wedding gifts are tax-free. If the gift fits a certain criteria then it isn’t taxable, which is great, but if you received more than £1,000 as a gift, you have to pay IHT. Not hating that tax-free toaster so much now, eh?

 Wedding gifts can be tax-free if:

  • They’re given before the wedding
  • There’s proof the marriage went ahead
  • The gift is up to £5,000 for a child
  • It’s up to £2,500 to a grandchild or great-grandchild
  • It’s up to £1,000 for anyone else

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