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.
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?’
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