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If you win the lottery, do you need to pay tax on your winnings in the UK? You probably feel elated after winning the lottery, but reality will catch up soon. And this is where the questions start. How do you declare lottery winnings, and how do they affect your finances? This article helps you sort your taxation issues after winning big.
Lottery winnings are generally not taxable in the UK. However, there are exceptions when taxes are due. This may include income tax for interest and inheritance tax if you decide to gift your winnings.
This post is not financial advice. Consider speaking to an independent financial advisor if you need individual advice.
Is the National Lottery Tax Free?
Whichever lottery you play, there are no immediate taxes on winnings. This includes the national lottery and other lotteries. HM Revenue & Customs (HMRC) does not count lottery winnings as income. Thus, there are no taxes. You get to keep everything you win.
You’ll have to pay taxes on your winnings in a few instances:
- When you gain interest on your winnings
- When you have investment returns from your winnings
- If you gift your winnings or pass away
1. Gaining Interest on Lottery Winnings
Whether you win big or small, you must put your winnings somewhere. In the first instance, this is usually a bank account. From there, you may transfer your money to a savings account.
If your bank or savings account pays interest, you may need to pay income tax. Income tax is due on all your income, including your salary, side hustle earnings, and interest. How much you will pay depends on your earnings:
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Personal allowance | Up to £12,750 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| High rate | £50,271 to £125,140 | 40% |
| Additional rate | over £125,140 | 45% |
This tax is cumulative. You pay no tax on your first £12,750 income. Then, you pay 20% tax on earnings above this amount until you reach the high-rate threshold. You must pay income tax if you have already used your personal allowance. To declare this, you need to fill in a self-assessment. The deadline for this is the following January.
Before paying taxes, check if you are eligible for the Personal Savings Allowance.
Avoiding Income Tax on Lottery Winnings
There is a legal way to avoid income tax on the interest of your lottery winnings. Individual Savings Accounts (ISAs) are tax wrappers that protect you from income tax. Interest on the money in your ISA is tax free.
You can pay up to £20,000 per tax year into your ISA. This amount is the total you can pay into all ISAs together. It does not increase if you have more than one ISA.
If your winnings exceed £20,000, you cannot pay it into an ISA all at once. Instead, the best strategy is to fill your ISA and then wait until the next tax year. Then, you can add another £20,000.
2. Having Investment Returns from Lottery Winnings
Capital Gains Tax
Another way to put your lottery winnings to use is to invest them. This could be buying stocks, bonds, or funds. If you decide to do this, you may need to pay Capital Gains Tax.
This tax is applied to your investment profits. For example, if you buy and sell a stock for a higher price, the difference in buy and sale price would be your profit.
With Capital Gains Tax, you also get an allowance. If you stay below £6000 (or £3000 for trusts), no tax will be due.
Dividend Tax
Dividend Tax is another tax that may be due on your investments. A dividend means receiving an income from shares or funds without selling them. Companies making a profit may pay some of this to their investors as a lump sum.
How much Dividend Tax you pay depends on your total income and tax group. You must only pay this tax if you exceed your personal allowance.
| Tax Band | Dividend Tax |
|---|---|
| Basic rate | 8.75% |
| High rate | 33.75% |
| Additional rate | 39.35% |
3. Gifting Lottery Winnings
If you win the lottery, you may want to gift some of your winnings to your friends and family. There would be no tax to pay for these gifts. Your loved ones can get the whole amount without any deductions.
The only issue may arise if you die within seven years of gifting your lottery winnings. In this case, the recipients need to pay Inheritance Tax. Inheritance Tax is due if:
- The value of your estate is above £325,000
- You leave everything above the £325,000 threshold to someone other than your spouse, civil partner, a charity or a community sports club
- The gift occurred within the past seven years
If the lottery winnings were gifted within the past years before your death, the tax rate is as follows:
| Years Before Death | Inheritance Tax Rate |
|---|---|
| 1-3 | 40% |
| 3-4 | 32% |
| 4-5 | 24% |
| 5-6 | 16% |
| 6-7 | 8% |
| More than 7 | 0% |
Can You Share Lottery Winnings Tax Free in the UK?
Yes, you can share lottery winnings tax free in the UK. There are no taxes on cash gifts. The only exception would be if you die within seven years of gifting. In this case, the recipient may need to pay Inheritance Tax.
How to Give Money to Family After Winning the Lottery
If you want to gift your lottery winnings to your family, there are no legal challenges. Yet, you may face some other difficulties.
1. Decide Who to Gift Your Lottery Winnings to
The lottery winnings are legally yours, so you can gift them to whoever you want. However, who you gift your money to can detrimentally affect your family’s dynamics.
Some family members may be upset if you don’t share the winnings equally. This may lead to cutting you and the people you gift off. This does not mean you have to share your winnings with everyone. You have to communicate clearly. Another option is also to keep your win private.
2. Decide How to Gift
You do not have to transfer the winnings as cash. There are many other ways your family can benefit from your winnings. If you know someone is bad with money, you could give them physical gifts instead.
If you want to gift money to someone under 18, consider setting up a fund for them. The person can then use that money to pay for university or use it as a house deposit.
3. Transfer the Winnings
The actual act of gifting lottery winnings is straightforward. If you want to gift cash, you can make a bank transfer. Most banks limit how much you can transfer in one go, so you may need to split the payments.
Are Lottery Winnings Taxable in the UK? Summary
Lottery winnings in the UK are not generally taxable. You can keep the whole amount or share it with others tax free. However, there are exceptions, and you may need to pay Income Tax, Capital Gains Tax, Dividend Tax, or Inheritance Tax. You may consider speaking to a financial advisor.
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