Should we pay tax on prizes?

Compared to the United States, we’re pretty lucky here in the UK. Why? Because lottery, gameshow winnings and competition prizes are completely tax-free!

Did you know that US residents have to pay tax on their prizes? Yes – even Olympic Medal and Nobel prize winners have to pay huge tax bills! When Sheree Heil won an Audi R8 worth over $150,000 on The Price is Right, she had to pay over $40,000 in taxes! In some cases, the tax has to be paid up front before they even receive the prize – that’s a ton of cash if you’re a big winner. Read more in the Forbes article ‘All prizes trigger taxes (and you can’t pay IRS in doughnuts)’ .

Just think… would you enter a prize draw to win a luxury £30,000 cruise if you had to pay £8,000 tax on it?  I doubt most of us would, but that’s what American compers need to consider before they click that ENTER button!

I’ve often wondered if there are situations where we might have to declare our prizes as taxable income here in the UK, so I’ve done a bit of research and spoken to HMRC.

Example 1

A professional photographer wins cash prizes in free-to-enter photography competitions  – are these prizes taxable?

Yes. If they are a photographer professionally, any photography prizes won are considered income generated by the business and should be declared on their tax return. See ‘Are Writing Competition Prizes taxable?’ from professional writer Christopher Fielden.

However, This is Money considers a question from an artist who was nominated for (and won) a £5000 prize. They didn’t choose to enter the competition, it was their client that submitted the entry – so it could be argued they shouldn’t have to pay tax on the prize. Read more in ‘I just won a £5,000 prize for my work that I didn’t even know I’d been entered for – do I have to pay tax on the winnings?’

Example 2:

A stay at home mum enters competitions for a hobby. She wins electronics and gadgets prizes which she sells on eBay. Does she have to pay tax on them?

For now, this comper is safe – but if her eBay sales go over the £11,850 personal tax allowance, this might suggest it’s a full-time income – especially if the sales are regular and she’s actively looking to win prizes to sell on! Read ‘Do I have to pay tax for selling on eBay?’  for more details.

What would happen if UK prizes were taxed?

So, if our government decided that we should follow the US example, what would happen to comping? It probably wouldn’t be considered a money-saving hobby any more! We would see bigger, better and more appealing prizes to tempt us into entering – after all, would you really want to pay tax on a prize t-shirt? There would hopefully be more ‘cash alternative’ options in the T&Cs (to help us out with the tax bill!) – and hopefully compers would only be entering for prizes they want to win! 

Would you still enter competitions if you had to pay tax on the prizes? Let me know your thoughts in the comments!

Image courtesy of Simon Miles at FreeDigitalPhotos.net 

14 Responses

  1. susan devere says:

    I am running the winacastle competition and I think it would be worth paying the taxes on the US entries. We may be adding that in this week. Just looking into it. But if people enter, they shouldnt have to worry about the cost.

  2. William Ratcliffe says:

    Concerning the lottery surely the tax as already been taken out before the money is paid out , its certainly not tax free ??

    • Di says:

      TNL don’t pay tax, they do have to give 12% of ticket sales as ‘lottery duty’ to the government. And the 28% of sales that goes to ‘good causes’ is sometimes considered a ‘stealth tax’ as some of it goes to the Big Lottery Fund, which supports public spending.

  3. D Fairman says:

    I was always under the impression that US compers only had to pay tax on the combined value once it was over a certain amount. Kind of like in the UK, if we earned a wage amount, we’d have to declare it.

    • Monica Gilbert says:

      Taxes are triggered above a certain value, and the sponsor has to supply a specific form stating the value of the prize so that it is declared on tax returns. My mother got stuck paying taxes on a small riding tractor type thing she won to use in the garden. I don’t remember the value. I haven’t declared any of my contest winnings for a few reasons. I don’t think the values have been high enough to trigger taxes. UK competitions don’t give IRS (US tax agency) forms. And I would honestly find it ridiculous to pay taxes to a country I haven’t lived in for years for a contest entered and won on another continent.

  4. Lorraine says:

    If I had to pay tax on winnings, I’d definitely have to reconsider what I entered.

    And this post gave me a quick double take, because Christopher Fielden is a very old friend of mine, and blooming lovely bloke.

  5. Mark Mascall says:

    Same as some National Lottery scratchcards etc prizes can already be taxed if payments are spread over more than one year.
    But it is very unlikely that will happen with one off prizes as if the income becomes taxable then all the expenses related to it can become tax deductible – cue rush for self-employed registrations – that’s why income from gambling is not taxable, most gamblers lose and could offset their losses against other taxable income effectively getting hmrc to cover their losses while if they were lucky enough to win overall they would only lose a percentage of their winnings.

  6. Hayley Atkins says:

    No,it would take all the fun out of comping. Dont give this awful government another silly idea to put in place!

  7. Kathryn Hipkin says:

    No. It wouldn’t be any fun any more, just another expense

  8. janice skelton says:

    I doubt it, it would be a case of could you afford to carry on comping particularly if you couldn’t find funds before the prize was allocated.

  9. Christina Curtis says:

    I am not sure I would carry on with the Hobby in the same way having to worry about affording the tax. Especially when lots of the things I win are put away for Christmas I would see it as an extra expense rather than money saving. and I would hate to be taxed on a runners up prize when it wasn’t something I particularly wanted if that makes sense.

  10. Sylvia Robbins says:

    I’d devote my time to another hobby.
    I would just say that if uk residents enter draws set by Irish (Eire) companies and win a prize, I have been told that taxes or import duty must be paid.
    This would apply to all foreign countries. This may not be true.

  11. Neill Johnstone says:

    I detest having to deal with HMRC so there’s no question I’d comp differently. Never mind the paperwork involved with paying tax on 99p items, what do you do about paying tax on “goodie bags” and promotional movie tie-in trinkets? And if I’m paying tax, does that make me (and every other one-time winner) professional?

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