Winning lottery does not invite taxes in UK directly however once the amount is submitted in bank as savings account, Income Tax is charged on the interest gained. The taxes that you might have to pay are Income Tax, Capital Gains Tax and Inheritance Tax depending on the amount you win.
The National Lottery in the United Kingdom was first introduced in 1994. Since the time of its inception, the UK lottery is now one of the largest in the world, played regularly by over 70 percent of the population and with a turnover of about £5.5 billion per annum of which well over 80 percent comes from the National Lotto game, and the rest from scratch cards. No other lottery organisation is allowed by law to offer prises of over £100,000 and in practice no other organisation competes significantly with the national lottery with respect to offering huge prises for very small stakes.
Where does the Money Go
The big question that is on most people’s mind is, ‘where does all the money go?’ The answer is that for every £1 spend on the UK lottery:
- Fifty percent is returned to the punter in the form of prises
- Twenty-eight percent goes to a government-regulated fund for “good causes,” most of which goes to projects that government might otherwise be expected to function in the areas of health, education, the environment, the arts, sport, heritage, and public works; the rest goes to private charities.
- Twelve percent goes to government in the form of straight taxation.
- Five percent goes to the 25,000-odd Lotto retailers and the 10,000-odd instant-only retailers.
- One percent goes to investors in the form of profits
- The remaining 4 percent goes to operating costs, including the costs of competitive salary packages for employees.
Taxes on Lottery Winnings
This may be surprising, as other countries' tax collectors do take money from tax winnings. But in the UK, lottery winnings are not liable for either Capital Gains Tax or Income Tax. What’s more, winning on foreign lotteries, like winning on EuroMillions will also not be subject to any income tax. Well that great news isn’t it? In reality, its best you read on without jumping to quick conclusions just yet.
How much Tax do you pay on Winning Lottery?
You do not pay any tax on winning lottery in UK, however you have to pay Income tax on the interest you gain when you keep the amount in bank. If your amount is higher, you might have to pay almost 40% (or 36%) as inheritance tax.
Is Lotto winning tax free?
The winning amount is tax free, however you will be charged when you put it in the bank or when inheritance tax (40% of the amount) is charged.
Is winning amount of EuroMillions tax free?
If you are a UK resident, then no taxes are levied on the winning amount. However, if you are from another country and have won UK Euromillions, then taxes will be charged depending on the local laws.
Taxes on Savings Account
Despite lottery winnings enjoying a non-taxable status, it is highly probable that once you deposit your winnings into your bank account you will have to pay taxes in the interest accrued which will be counted as Income Tax. This could happen by HMRC levying taxes on your savings account. Your Independent Savings Account (ISA) is limited to £15,240 per year, which is sure to be a tiny fraction of your jackpot winnings. So if you choose to deposit anything above that, your winnings will be liable to Capital Gains Tax. In this scenario there are only two options that present themselves to you; either you put the winnings in a non-interest savings account, or you invest the money into some that is non-taxable.
Inheritance Tax on Lottery Winners
In the UK, any win that takes the value of your estate above £325,000 for individuals or £650,000 for couples incurs inheritance tax of up to 40 percent on everything above that threshold, or 36 percent if at least ten percent of the total is donated to charity. HMRC will tax you on a sliding IHT scale should you die within seven years of gifting any cash to friends and relatives.
You should also note that money gifted to friends and acquaintances is still counted as part of your estate and the recipients would have to pay tax on the amount if you were to die within seven years of making the generous gesture. Long story short, if you plan on buying anything above £325,000, make sure you are alive during the next 7 years. As per HM Revenue and Customs, the most anyone can receive as a gift before inheritance tax applied is £3,000 paid up each year.
If your winnings are as part of a syndicate, this can cause problems if the person who receives the cheque dies within seven years of the win. However, they can protect themselves against IHT liabilities by drafting a simple agreement. As per HMRC, “No liability to inheritance tax arises on winnings by a football pool, National Lottery or similar syndicate provided that the winnings are paid out in accordance with the terms of an agreement drawn up before the win."
You don’t need anyone to tell you that winning the lottery is a big deal. For most, taxes could be the last thing on their mind, while they are overjoyed by the prospect of winning a huge sum of money. However, keep in mind that the inheritance tax could take a chunk (40%) out of your lottery winning if you were to die. After all we’re dealing with huge jackpot numbers that add up to millions of pounds. IHT could very well bite into a sizable chunk of your winning leaving your loved ones short by a lot. Imagine you won £100 million in the lotto; you would end up paying £40 million to the government. The point to keep in mind is that it’s important to spend all the money while you still can. If you’re buying something big, that great!! Just make sure you live for the next seven years to really enjoy it.
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