Personal injury compensation is not taxable, although there are exceptions regarding interest payments and investments.
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Is Personal Injury Compensation Taxable?
If you’ve suffered harm because of someone else’s negligence, you might want to make a personal injury claim and seek compensation for your pain, suffering and financial losses.
But many people wonder whether personal injury compensation is taxable and how much of their payment they will actually keep if they make a successful claim. The good news is that compensation for personal injury is generally tax-free in the UK, subject to limited exceptions such as some types of interest and returns on invested compensation.
That means that HMRC will not deduct tax from your settlement, as this is intended to put you back in the position you would have been in if the accident had not happened, and not to provide extra income.
In this guide, we explain HMRC’s rules on taxing personal injury compensation and yogur tax obligations, to help you understand exactly what to expect when making a claim.
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How is personal injury compensation calculated?
A compensation claim for a personal injury is calculated based on two types of damages:
- General damages cover the pain, suffering and loss of amenity caused by the harm you suffered. These are based on the type and severity of the injury and its impact on your daily life and emotional well-being.
- Special damages cover the financial losses and expenses directly related to the injury, including loss of earnings, medical costs and home adaptations.
Your final settlement is calculated by adding up the general and special damages. In addition, your claim may include interest to compensate for any delay in receiving compensation. The tax treatment of interest payments depends on the period it covers (see below).
Will I have to pay tax on my personal injury compensation?
No, in most cases, personal injury compensation is protected by legislation from Capital Gains Tax or Income Tax in the UK, although some associated interest and any returns on invested compensation may be taxable. That is because compensation is intended to put you back in the position you were before the injury occurred, and not to provide extra income.
This applies to awards for:
- Physical injuries such as scarring, broken bones, internal organ injuries or soft tissue injuries.
- Psychological injuries such as anxiety, depression or post-traumatic stress disorder (PTSD).
- Lost earnings caused by the injury, including bonuses, promotions and overtime.
- Medical costs, care costs, and any other related out-of-pocket expenses.
This means that if you receive compensation for the pain, suffering and financial losses caused by someone else’s negligence, HMRC will not take tax from your settlement. The few exceptions are discussed below.
When is personal injury compensation taxable in the UK?
As seen above, you do not have to pay tax on compensation awarded for the pain, suffering and financial losses caused by a personal injury, as it does not provide income or profit.
However, there are a few exceptions:
Interest on settlement
Interest that is part of the damages for the period up to judgment or settlement is exempt from Income Tax under s751 of the Income Tax (Trading and Other Income) Act 2005. Interest for the period after an award or judgment but before payment is taxable (often with tax deducted at source).
For example, if £4,000 represents “interest on damages” included within the settlement up to the settlement date, it is not taxable. Any additional interest for late payment after the award would be taxable.
Lost earnings
If, contrary to the usual approach, the compensation awarded for your lost wages, bonuses and other benefits were to be calculated on your gross income, then that part could be treated as taxable. However, loss of earnings is normally assessed on your net income (the Gourley principle), so you should not pay tax again on the damages received.
Invested settlement
If you choose to invest your compensation or place it into a savings account that gains interest, any return you earn from it becomes taxable and is usually taxed at source.
You could consider using tax-efficient accounts, such as an Individual Savings Account (ISA), to minimise the amount of tax you pay on your interest.
Do I need to report my compensation payment to HMRC?
No, you do not need to report the compensation settlement itself to the HMRC. This is not treated as taxable income, and you will not be expected to include it in your tax return.
However, you should report any taxable post-award delay interest and any interest, dividends, or gains you later earn from investing your award, if not already taxed at source.
Your solicitor will be able to advise you on your legal obligations to ensure you comply with the relevant legislation.
Can compensation for personal injuries affect other benefits?
Yes. While personal injury compensation isn’t taxable, it can affect eligibility for certain state benefits.
Compensation awards are usually ignored by the government for the first 52 weeks. However, once this period expires, it can lead to a reduction or loss of entitlement to certain means-tested benefits, such as Universal Credit and Housing Benefit.
To protect your benefits, your solicitor may recommend that you place your compensation in a personal injury trust. This ensures your money is ring-fenced and not counted when assessing your eligibility for means-tested benefits.
How do I know if I am entitled to personal injury compensation?
The easiest way to find out if you are entitled to claim compensation for a personal injury is through a free consultation with a specialist solicitor. They will be able to verify whether:
- The defendant owed you a legal duty of care.
- They breached this duty and caused an accident or unsafe conditions.
- Your injury is a direct result of their negligence.
- You are within the legal time limit for starting a claim (generally 3 years, with different limits applying in some cases, for example for children or people who lack mental capacity).
If these can be supported by evidence, your solicitor will help you make your claim for compensation.
What is the average payout for a personal injury claim?
Each case is unique, and the amount of compensation awarded depends on the type of injuries suffered, their severity and the related financial losses.
Special damages often make up the bulk of the compensation award and are calculated based on documents such as receipts, invoices, payslips and bank statements.
General damages are assessed by referring to the compensation brackets for various types of injuries published in the 18th Edition of the Judicial College Guidelines. For example, you could receive the following awards, depending on the circumstances of your case:
| Injury Type | Description | Compensation |
|---|---|---|
| Brain Damage | Brain damage causing severe physical and cognitive disability, full-time nursing care and significantly reduced life expectancy | £373,000 - £534,000 |
| Leg Injuries | A severe leg injury falling just short of amputation | £127,000 - £180,000 |
| Back Injuries | Back injuries causing chronic conditions and permanent disabilities | £51,000 - £92,000 |
| Kidney Injuries | A kidney injury with significant risk of future loss of kidney function | Up to £85,000 |
| Ankle Injuries | An ankle fracture or ligament tear causing some permanent symptoms, such as difficulty walking on uneven ground | £18,000 - £35,000 |
| Post-Traumatic Stress Disorder | PTSD with near-full recovery but some ongoing effects that are not grossly disabling | £11,000 - £31,000 |
| Hand Injuries | A moderate hand injury, including crush injuries, penetrating wounds or soft tissue damage | £7,500 - £18,000 |
| Fractured Nose | A simple undisplaced nose fracture with complete recovery | £2,300 - £3,300 |
Will I keep 100% of my compensation settlement?
Although personal injury compensation is generally tax-free, you won’t usually keep 100% of your settlement due to legal costs.
If your solicitor represents you on a no win no fee basis, they will deduct a success fee if they win your case. This fee is pre-agreed and capped at 25% of your general damages and past financial losses.
You may also need to cover the cost of an After the Event (ATE) insurance premium if you took legal expenses insurance at the start of your claim. After these deductions are made, you will keep the bulk of your compensation payout.
Key takeaways
Personal injury compensation is not considered income or profit and is not taxable. Pre-award “interest on damages” in a personal-injury award is also exempt; only post-award delay interest and any returns you later earn are taxable and may need to be declared.
Our team of specialist solicitors can explain precisely how much compensation you could receive and whether you may need to pay any tax on it. For a free consultation, do not hesitate to call 0800 470 0472 or request a call back using our contact form.
