Are Lottery Winnings Tax-Free?

Author: Neha Agrawal

So you have just pocketed a massive one hundred and fifty million pound jackpot. You would be kind of furious and feeling slightly robbed if the tax man came knocking at your door and said, “we’ll have half of that,” before it had even reached your pocket, wouldn’t you? Of course you must pay tax on some things, but what right has the tax-man got to take a massive sum like half of your fortune, just because you had some luck on the lottery?

So do lottery winnings count as tax-free money, and how much cash is the tax-man permitted to “steal” from you, if you win a massive jackpot? Unfortunately, it greatly depends on just what lottery you happen to be playing.

There are several taxes you could be charged for with a lottery win. If you keep your winnings in a current account and hire an accountant, you will probably do fairly well with your money. However, if you intend to invest it, be prepared for heavy taxation, and you could be charged income tax as well. Even if you only want to spend it on your children, your grandchildren, and other family members, they might unfortunately find themselves paying inheritance tax on it.

Suddenly the world seems less fair, but that’s unfortunately the way it is. It especially doesn’t seem fair with state-run lotteries. The state is paying out a fortune to you, only to claim a large portion of it back. However, there are certain lotteries which are tax-free. The Euro Millions is just one such example of a completely tax free lottery. No taxes can be charged for winnings on the Euro Millions, at least no income taxes.

And what about interest rates when it comes to the lottery winnings? Well, this is the tricky part to understand. In most cases, the lump sum you receive from the lottery company is tax-free and does not count as a source of income because you didn’t work for it.

However, once it is in a bank account, specifically a savings account, you will accumulate interest, and the interest the bank pays out will be taxable. Considering the interest is a taxable regular income, there is little you can do to avoid it. Unless of course, as mentioned, you get yourself a good accountant and stick it in a current account.

Either way, whether or not your lottery winnings are taxed depends entirely on what lottery you are playing, and how the laws for lottery taxation work in your country.