Do You Pay Tax On Lottery Winnings in the UK?

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It’s something that we all dream about, isn’t it? Listening to the TV and hearing them one by one read out all the corresponding numbers to the little piece of paper you are holding in your hand. 

It would undeniably change your life forever. It’s hard to really even imagine what a difference a payout like that would make to your life. 

But while everything else in your world may be about to flip upside down and inside out, the last thing on your mind at this moment is probably taxes. 

However, you’ll probably be happy to learn that your lottery winnings aren’t taxable in most cases. 

A very happy woman with hands raised while the money are pouring down around here

Throughout this article, I’ll answer any questions you may have about lottery winnings and taxes and when you may need to pay. So let’s get straight into it.  

Is The Lottery Tax-Free?

Way-hey! If you’ve recently won some big money on your lucky lottery ticket, the good news is that simply put, those winnings are tax-free. 

As long as you are a UK tax resident you’ll be exempt from all of the following taxes (only on your winnings, you may be lucky but you’re not completely tax-exempt lucky): 

  • Capital Gains Tax
  • Income Tax
  • National Insurance 

According to HMRC, lottery gains are not classed as income but rather as gambling. So should you win, you won’t be losing massive chunks of that money to the taxman. (Yay!)

Tax On Deposited Funds

Of course, it couldn’t be quite that simple. There are some things to bear in mind should you receive those millions overnight. 

Once that money enters your bank account, you won’t be taxed on the actual sum of money. 

However, that large amount of money will quickly start to build up some hefty interest in your bank. And the interest that you accumulate will be taxed. 

If you wisely decide to invest your money into other venues that will create additional income, you will also need to pay income tax on any money that you earn from this investment. 

So for example, say you use some of your winnings and purchase a property that you decide to rent out. 

Then you will need to pay income tax on those earnings given you receive more than £12,570 annually. 

Lottery Winnings & Inheritance Tax

Image of a white sheet with written texts that read Last will and testament and Inheritance Tax beside a pair of eye glasses

Once you receive that massive winning and it’s officially in your bank account, that money automatically becomes part of your estate. 

So once you pass away, the person that inherits your estate will need to pay Inheritance Tax on the money they are bestowed. 

Not only that but any property or assets purchased from your lottery winnings that are inherited will also be eligible for Inheritance Tax. 

Unfortunately, Inheritance Tax is quite high, currently standing at around 40%. Keep in mind though that you will only be taxed on anything above the value threshold of £325,000

So if the estate is below this value you will not have to pay Inheritance Tax. You will however still be required to declare your inheritance to HMRC. 

Lottery Winnings & Gift Tax

Many lottery winners very graciously share their newfound wealth with family members and friends. 

But it is important to note that gifts from winnings are subjected to Inheritance Tax. If you want to avoid this tax you’ll have to follow the restrictions below: 

  • Gift the money more than 7 years before you die
  • Gift the money to your spouse or civil partner
  • Gift the money within the £3000 annual allowance. 

What Is Annual Allowance? 

So annually, you’ll only be allowed to gift £3000 tax-free. Any more than this within the year will be taxed. 

One year’s allowance can be carried forward to the next year. But this can only be done once as there is a maximum limit of £6000. 

What Happens If You Die With 7 Years Of The Gift?

HMRC has a tax scale for what rate of Inheritance tax will need to be paid in this instance. 

  • 0-3 years – 40% Tax rate
  • 3-4 years – 32% Tax rate
  • 4-5 years – 24% Tax rate
  • 5-6 years – 16% Tax rate
  • 6-7 years – 8% Tax rate
  • 7+ – 0% Tax rate

Other Tax-Free Gifts

A covered area full of people including a woman and a girl giving something wrapped in blue plastic wrapper giving it to a woman carrying a kid

If you are hoping to be a little more charitable with your winnings, you can give as much as £250 per tax year to anyone at all without there being any Inheritance tax. 

This is true as long as they haven’t received any gifts from the annual allowance mentioned earlier. 

Wedding gifts may or may not be taxable. That doesn’t sound very helpful. Let me explain in further detail. 

Gifts must fit particular criteria to be tax-free, but usually, if you receive a gift that is valued above £1000, then it will be subject to Inheritance tax. 

So when are wedding gifts tax-free? 

  • When they’re given to the couple before the wedding
  • When there is proof the wedding went ahead
  • When the gift valued up to £5000 is for a child
  • When the gift valued up to £2500 is for a grandchild or great-grandchild
  • When the gift valued up to £1000 is for anyone

Final Thoughts

The only thing that could be better than winning free money is not having to pay tax on that free money! 

We all love when 100% of the amount ends up in our own back pockets right? And however much you win is completely yours. Now that really is a cause to celebrate. 

However, it is important to keep in mind that any interest accrued from your winnings will be subject to National Insurance. 

And when you eventually pass that money onto your children or other family members as inheritance, it’s likely that there will be some tax on that too. 

Then of course, if you are a generous soul, who expects to be sharing their wealth, you’ll need to take gift tax into account too. 

If you have won a life-changing amount of money on the lottery recently, I’ll end this article by saying a big congratulations! (and ask if you can pick my lotto numbers in the future please, I’d like some of your luck) 

Image showing a 3 blue circles on top of each other on display with text written Play here and a text overlay that reads Do You Pay Tax On Lottery Winnings

About Emma Healey

Emma is a recognised family finance and budgeting expert and founder of Mum's Money. Her advice has been featured in Readers Digest, Yahoo Finance, Lifehacker, The Simple Dollar, MSN Money and more.