Are Personal Injury Claims Taxable?

If you’ve been involved in an accident that wasn’t your fault, you may have filed a claim and received compensation, which would cover any expenses as a result of this accident. 

But is this compensation tax-free? And do you have to pay any tax on any interest accrued?

Our helpful guide will break down whether compensation is taxable, and how this applies when it’s invested or when interest has accrued, providing you with all the information you need to know about personal injury tax.

Is My Personal Injury Compensation Tax-Free?

You can rest assured that any compensation you receive as part of a personal injury claim remains tax-free. This means it’s not subject to capital gains tax, income tax or national insurance payments.

Compensation settlements are not earned or part of an income, so therefore cannot be taxed by the UK government in the same category as income tax. 

This is the case whether you’ve had an accident at work, a slip, trip or fall, you’ve been involved in a road traffic accident, or you’re a victim of medical negligence. In short, any type of personal injury claim is untaxable. 

There’s specific legislation in place that ensures any compensation you receive off the back of a claim cannot be taxed – whether it was a lump sum or instalments over a period of time. It also doesn’t matter if your case was settled in or out of court – either way, your fee is exempt from tax.

Are Any Types of Compensation Taxable?

While most compensation amounts are not taxable, there are a few exceptions to the rule.

In 2014, HM Revenue & Customs (HMRC) changed its rules to state that some types of compensation are now taxable. However, these types of claims were mainly where the other party paid compensation to prevent you from taking any legal action. 

Personal injury claims were not affected and remain tax-free.

Another example of a type of compensation that could be taxed is from mis-sold PPI (Payment Protection Insurance). In this scenario, you’re also likely to have received interest on this compensation, which is then taxed. However, again, this does not apply to personal injury claims.

Will I Need to Pay Tax on Any Accrued Interest?

Any interest that accrues from the time your accident happened until the time the case is settled will be included in your personal injury compensation, meaning that this is also tax-free.

However, if any extra interest builds up due to payment delays, you will then need to pay tax on that amount. For example, if a settlement amount has been agreed to 6 months before receiving the money, you’d receive some interest on this compensation that will then need to be taxed.

In short, you won’t need to pay any additional tax on any interest accrued from the time of the accident, only on interest due to payment delays that accrue after a settlement is agreed.

Can You Invest Compensation?

Yes – your compensation money is yours alone, and you can choose how you spend it. 

While it will likely be used on expenses that are related to your accident, such as private medical expenses, any long-term care, rehabilitation and support, or to account for any loss of earnings, you can invest this money if you can afford to.

For those with long-term or life-changing injuries, investing at least some of the compensation received is likely a very sensible and worthwhile way of making the payout last longer – especially with rising inflation.

In some cases, people may set up separate accounts in building societies where their money can earn interest. However, any interest that you earn after you’ve invested your compensation will then be taxable, as is the case with any type of savings account.

Choosing CEL Solicitors for Personal Injury Claims

We understand that many people may worry that if their compensation claim is successful, they will then be hit with a large tax bill. We’re here to reassure you that it won’t be the case. 

Our expert team at CEL Solicitors specialise in personal injury claims with a strong track record of recovering millions for clients.

We also operate on a No-Win, No-Fee basis. This means that you won’t need to pay any fees up front, giving you access to the legal support you deserve without financial worry.

Additionally, our expert consultation is completely free – we’ll listen, review your situation carefully and provide clear advice on your next steps.