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Home » Personal Injury » Are Personal Injury Claims Taxable?

Are Personal Injury Claims Taxable?

Will I need to pay tax on my compensation settlement?

There is a lot of confusion surrounding tax and personal injury claims. A lot of people are worried that their compensation settlement will be subject to tax and are therefore put off from making a claim. It is, however, important to note that personal injury compensation settlements are exempt from tax.

Will I be charged tax on interest?

The compensation that you may obtain through your personal injury claim is made up of:

The settlement amount quantifiable through your injuries, damages and out-of-pocket expenses acquired.
The interest, on top of the amount, that has built up throughout the duration of the claims process.

There is an exception to this rule, involving instances when there is a delay in paying compensation to the claimant. Any interest that is accrued during the time from the claim being settled to the date that it is paid to the claimant is taxable. This is because the interest is paid on the gross amount and should therefore be declared on your annual tax return.

For example:

A claimant is awarded a settlement figure of £15,450 on 15 August 2019, but the payment is delayed until 15^th February 2020.

A further £125 is added to represent six months interest – this amount should be declared on their tax return.

How can I invest my compensation?

You may decide to invest all, or part of your compensation in a high interest savings account. The interest that you receive from your investment might be taxable. You will need to declare any interest on your annual tax return.