I am often asked by my clients whether the compensation they receive following a successful personal injury claim is taxable. This is understandable given the tax laws in the UK are complicated.
Personal injury compensation can be awarded as a lump sum or as periodic payment. It can be awarded as a result of a Court judgement or an out of court settlement. Depending on the individual case, the compensation awarded can range from a few thousand pounds to millions but the rules on whether the compensation is taxable or not is the same.
The law in the UK says that compensation or damages awarded for personal injuries are tax free. This includes any interest from the date of the injury to the date the settlement is agreed is exempt from tax.
When might tax be payable
If there is a delay in payment of your compensation after the claim has settled then there may be some tax to pay. This tax is only payable on the amount of interest accrued on the compensation payment from the date it should have been paid. This amount of “extra” interest should therefore be declared as income and included on a tax return.
If the damages award is invested, any interest generated would however, be liable for tax.
Let’s look at an example:
Ms X suffered an injury on 1 December 2015 and made a claim for compensation. The claim settled for £10,000 on 1 April 2018. However, there was a delay in payment of the compensation and as it was not paid until 1 June 2018 there was £500 interest running from 1 April to 1 June 2018.
In this example the £10,000 is tax free but the additional £500 interest may be subject to tax.