Do You Pay Tax on a Lotto Win?

Lottery winnings in the UK are tax-free, but taxes may apply when gifting or investing the money. Learn about Inheritance Tax, Gift Tax, and other rules.

Winning the lottery is a life-changing event, but many people wonder whether they will have to pay tax on their winnings. Unlike in some other countries, UK lottery winnings are tax-free. However, tax can apply when you deposit, gift, or pass on the money as inheritance.

This guide explains whether you need to pay tax on a lottery win, how winnings affect Inheritance Tax and Gift Tax, and how to manage your money efficiently.

Is the Lotto Tax Free?

Lottery winnings in the UK are completely tax-free. Whether you win the National Lottery, EuroMillions, Set for Life, or another official UK lottery, the money you receive is not subject to Income Tax or Capital Gains Tax.

The reason for this is that lottery tickets are purchased with money that has already been taxed. Since the government takes a percentage of ticket sales before awarding prizes, there is no additional tax on the winnings themselves.

Do You Need to Pay Tax on Lottery Winnings in the UK?

While the initial winnings are tax-free, tax may apply when you:

  • Deposit the money into a bank account and earn interest.

  • Invest the winnings in assets that generate taxable income.

  • Give away some or all of the winnings as a gift.

  • Pass on winnings as part of your estate after death.

Understanding these tax implications can help ensure that you manage your winnings wisely.

Tax on Deposited Funds

Once lotto winnings are deposited in a bank account, any interest earned on the money is taxable.

For example, if you win £1 million and deposit it into a high-interest savings account, the interest earned each year may be subject to tax. The amount of tax you pay depends on your Personal Savings Allowance (PSA):

  • Basic rate taxpayers can earn £1,000 in interest tax-free per year.

  • Higher rate taxpayers can earn £500 in interest tax-free per year.

  • Additional rate taxpayers have no tax-free allowance on savings interest.

If the interest exceeds these limits, it is taxed at 20% (basic rate), 40% (higher rate), or 45% (additional rate).

To reduce tax liability, winners often spread their savings across tax-efficient accounts like ISAs, which allow interest to be earned tax-free.

Lottery Winnings and Inheritance Tax

If a lottery winner passes away, their winnings become part of their estate and may be subject to Inheritance Tax (IHT).

Inheritance Tax is charged at 40% on estates worth over £325,000. If the winner leaves their estate to a spouse, civil partner, or charity, no Inheritance Tax applies.

To minimise IHT, winners can:

  • Set up a trust to manage the money.

  • Give away gifts before death, following Gift Tax rules.

  • Leave money to charity, which may reduce the taxable estate.

Proper estate planning can ensure that winnings are passed on efficiently.

Lottery Winnings and Gift Tax

If a lottery winner gives money away, they may be liable for Gift Tax, depending on when they pass away. The UK does not have a specific Gift Tax, but gifts can become taxable under Inheritance Tax rules if they are given within seven years of death.

The Seven-Year Rule

Under the seven-year rule, gifts are tax-free if the giver lives for at least seven years after making the gift. If the giver dies within this period, the gift may be subject to Inheritance Tax on a sliding scale.

  • Less than 3 years: 40%

  • 3 to 4 years; 32%

  • 4 to 5 years: 24%

  • 5 to 6 years: 16%

  • 6 to 7 years: 8%

  • 7+ years: 0% (Tax-Free)

Lottery winners who wish to share their money should plan gifts strategically to avoid unnecessary tax.

Other Tax-Free Gifts

Some gifts are always tax-free, regardless of when they are given. These include:

  • Annual gift allowance of £3,000 per year.

  • Wedding gifts of up to £5,000 for a child, £2,500 for a grandchild, and £1,000 for others.

  • Unlimited small gifts under £250 per person.

  • Payments towards living costs, such as rent or education fees, if made directly.

Lottery winners can use these allowances to give money to family members without triggering tax liabilities.

Final Thoughts

Lottery winnings in the UK are tax-free, but taxes may apply when depositing, investing, gifting, or passing on the money through inheritance.

To make the most of a lottery win, winners should consider:

  • Using tax-efficient accounts like ISAs to minimise tax on interest.

  • Gifting money strategically under the seven-year rule to reduce Inheritance Tax.

  • Seeking financial advice to structure wealth effectively.

For those who win large sums, professional estate planning can ensure that winnings remain as tax-efficient as possible.