Do you pay tax on Prize Money?
If you’re lucky enough to win big money, your first thought is unlikely to be about your tax responsibilities, but more likely to be about how you’re going to spend it!
At some point down the line, however, it is of course important to consider the tax implications of winning money. Fortunately, the rules are not too complicated if you win money that is unrelated to your profession – for example from gambling, the lottery or a radio phone-in competition. In these circumstances, you do not have to pay tax.
If, however, you win a prize or award that would be considered a normal source of income for your profession, for example if you are an Artist winning the Turner Prize, or a Golfer winning the British Open, then your winnings would be subject to tax. This is because they are considered part of your earned income, since these awards and competitions are a regular source of income for professionals working in those sectors. An interesting exception to this rule is that professional gamblers do not pay tax on their winnings. This is because HMRC imposes a levy on the gambling provider instead.
Of course, your lump sum winnings may or may not be taxable in themselves, but they could still lead to tax liabilities further down the line. In common with other savings and investments, you will need to pay tax on any interest earned from your winnings, on an annual basis. If you intend to give some or all of the money away, in order to avoid tax you can only give the gift to your spouse or civil partner, make the gift less than your annual allowance of £3000, give the gift to a registered charity, or give it as a wedding gift (up to £5000 for a child, £2500 for a grandchild or great grandchild, or £1000 to any other person).
If you want to give away more than £3000 to someone other than in the circumstances listed above, if you don’t want them to be taxed you need to be sure that you’re not likely to die within the next 7 years leaving an estate worth more than £325,000. Otherwise, the recipient will be liable for Inheritance Tax on a sliding scale from 40% down to 8%, depending on the length of time between the gift and your death.
If you won your money through a syndicate, UK lottery rules stipulate that only one person can be paid a prize, so it is essential that your syndicate has a formal agreement in place. You will need to show this to HMRC to prove that the money should be shared equally with no tax penalty, and that it is not a gift to the others from the named winner. If you do not have this agreement in place, then all members of the syndicate may have to pay inheritance tax if the named winner dies within 7 years of the prize money being shared.
If you’ve been lucky enough to win some money recently, and are worried about the tax implications then speak to your accountant. And if you’re feeling generous, we won’t mind if you want to drop off a few gold bars at the office either….