You don’t have to pay tax on clinical negligence compensation in the UK
Financial compensation awarded on a clinical negligence claim is intended, insofar as money can do so, to put the Claimant back in the position they would have been had the negligence never occurred. Damages can be awarded as a lump sum or, as is often the case with very severe injuries, as regular payments made over a period of time. Generally speaking, compensation for an injury and associated losses caused by negligent medical treatment is exempt from tax in the UK.
The exception to this is any interest accruing on compensation. If any interest is claimed in addition to the compensation sum up to the time of settlement, judgment and/or final payment, the interest claimed may be subject to tax. Likewise, if you choose to invest your damages in a way that generates interest, this interest may also be subject to tax.
Claimants should be aware that different tax rules may apply to compensation awarded or received in jurisdictions outside of the UK.
Your compensation may affect your eligibility to claim benefits
Your entitlement to receive certain means-tested state benefits will be affected if the compensation you receive brings the value of your savings or other capital assets to more than £6,000. This includes Universal Credit, Income Support, Job Seeker’s Allowance, Employment and Support Allowance and Housing Benefit. Other benefits which could also be effected by a compensation payment include free prescriptions, eyesight tests, dental treatment and state-funded care either at your home or in a residential/nursing home.
However, it is possible to preserve your entitlement to these benefits by putting your compensation in a Personal Injury Trust. Further information about Personal Injury Trusts can be found here.