The chance of winning the jackpot lottery in the UK is around 1 in 14 million. The odds aren’t high, but you’ve got to be in it to win it, right? So, let’s say you did win the windfall and found yourself suddenly millions of pounds up, what does that mean for tax?

Of course, tax might be the last thing on your mind after discovering you’ve won the jackpot, but it is something you’ll need to consider when deciding how to save, spend or stash your spoils.

Do you have to pay tax if you win the lottery?

The great news is that lottery winnings come with no tax strings attached, so all the prize money is yours to keep, tax-free, provided you’re a UK taxpayer. This applies no matter how much you win, from thousands to millions, and whether your numbers come up on the National Lottery, Euromillions, or a scratchcard you bought on a whim at the petrol station.

Some groups of friends or work colleagues choose to have a lottery syndicate because this is a good way to boost the chances of winning some cash. If you’re part of a winning syndicate, every member of the group will be able to enjoy their prize money tax-free.

In short, UK lottery winners aren’t required to pay tax on the money they win because HMRC categorises the influx of cash as gambling rather than as income or a capital gain.

But, while all lottery winnings are tax-free, that doesn’t necessarily mean the lottery winner is totally off the tax hook. Once the winner receives their cash prize, what they do next dictates their tax liabilities, which means the following types of tax may come into play:

• Income Tax
• Capital Gains Tax
• Inheritance Tax (IHT)
• Gift tax

Income tax

Once your winnings hit your account, you’re free to go out and blow the lot on whatever you like without giving tax a second thought.

That said, if you make the sensible choice of putting the money (or at least some of it) into a savings account, you may need to pay Income Tax on the interest you earn – not the full amount, just the interest.

If you invest the money anywhere, you’ll also need to pay tax on whatever you earn via that investment. For example, if you buy a property with your winnings and let it out to tenants, you’ll need to pay tax on the profits you make from renting it out.

Remember, you only pay Income Tax on the total amount of your earnings above the tax-free Personal Allowance threshold, which currently stands at £12,570.

Capital Gains Tax and lottery winnings

Capital Gains Tax is sometimes payable if you buy assets, such as a property which isn’t your main home or jewellery and paintings, and then sell them on again for a profit. If you use your lottery winnings for some major purchases then you might be liable for Capital Gains Tax if you decide to sell them in the future.

Inheritance Tax

Once your lottery winnings are officially in your name, they become part of your estate along with any other finances and assets you own. This means that anyone who inherits your winnings will be liable to pay Inheritance Tax. A spouse or civil partner won’t need to pay any Inheritance Tax, but other family members, children and friends will.

The current Inheritance Tax rate is 40%, but it only applies to anything above the £325,000 allowance threshold. It’s important to note that any beneficiaries of estate assets (such as lottery winnings) still need to inform HRMC of inheritance, even if it’s below the IHT allowance.

Gift tax

You can gift up to £3,000 per person each year without this being added to the value of your estate in the event of your death. If you go over this amount and you die within seven years of transferring the gift, your recipient may need to pay Inheritance Tax.

HMRC calculate this based on a standardised sliding scale:

• 0–3 years: 40%
• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%

If your recipient sells or disposes of their gift and make a gain from this, they may be required to pay Capital Gains Tax – but that’s not for you, the hypothetical lottery winner, to worry about.

 
Learn more about our online accountancy services. Call 020 3355 4047 or get an instant online quote.