If you are receiving compensation after a successful personal injury claim, first of all, congratulations, your money is on its way. But is compensation taxable? The good news is that most personal injury compensation is not taxable in the UK. There are, however, some exceptions.

In this guide, we’ll explain which parts of your personal injury settlement are tax-free, when tax might apply, and how to avoid common pitfalls.

What parts of a compensation payout are tax-free?

The majority of personal injury settlements in the UK are tax-free. It doesn’t matter if your case was settled by a judge or agreed through negotiations with the other side — the compensation itself is not considered taxable income.

This includes both general damages, which cover the pain and suffering of your injury, and special damages, which cover related financial losses.

This tax-free status is protected by UK tax rules and ensures that victims of injury are not penalised financially for something that wasn’t their fault.

When might tax apply to your compensation?

While most personal injury settlements are tax-free, tax does apply to any interest you make:

  • Interest awarded as part of your settlement
    If there has been a large delay between your personal injury and your compensation payout, you might have incurred statutory interest. This is to compensate you for a late payment. Statutory interest is taxable, so you must declare it.
  • Interest earned from investing compensation
    If you put your settlement money into a savings account, ISA, or investment, any growth you earn is taxable. For example, if you invest £10,000 and make £10 per month in interest, you must pay tax on that £10 earned.

What to consider if you’re planning to invest your settlement

Investing can make your money go further, but keep in mind:

  • Investing won’t keep the interest from your settlement tax-free.
  • Keeping your compensation in a separate account from your everyday finances helps with management.
  • You might want to explore setting up a personal injury trust.

A personal injury trust is a legal arrangement where your compensation is placed into a trust fund managed by appointed trustees. This ensures the money is managed separately and used solely for your benefit.

Do I need to report my compensation to HMRC?

In most cases you won’t need to report your compensation to HMRC as it is tax-free. You will, however, need to declare:

  • Any taxable interest awarded with your compensation
  • Any interest from savings or investments
  • Any capital gains if you sell assets bought with your settlement funds at a profit

Your bank will usually send you an annual interest statement to help. If you’re unsure, a financial advisor can guide you.

How Express Solicitors supports you after a claim

If you’re taking on a personal injury case with a significant potential settlement, Express Solicitors are here to help. After your claim, we’ll support you and your compensation too — helping you understand what is taxable, explaining the risks of wrongful tax evasion, and putting you in touch with money experts.

We aim to get you the most compensation possible and we offer this with a no-win, no-fee guarantee. You won’t pay us any legal fees unless your case is successful.

If you think you have a case, get in touch today for a free, no-obligation consultation and we can discuss your future.