Learn If Compensation Is Taxable
Learn the answer to the question, ‘Is compensation taxable?’ in this guide.
£85 million in compensation
Learn If Compensation Is Taxable
Learn the answer to the question, ‘Is compensation taxable?’ in this guide.
Do I Have To Pay Tax On My Personal Injury Compensation?
One of the most common questions we receive from our clients is, “Is personal injury compensation taxable?” When you’re potentially going to receive a sum of money, it’s natural to wonder whether or not it will be subject to tax. In this legal glossary guide, we’ll tell you everything you need to know about the tax rules surrounding personal injury compensation, including:
- Whether interest is taxable
- What happens if you invest your compensation
- Whether or not the 2014 HMRC rule changes will affect you
We hope our guide will answer any questions you might have, but if you still want to know more, our team are here to help. You can talk to one of our expert advisors for free when you get in touch by:
- Calling us on 0151 375 9916
- Making a claim online
Is Compensation Taxable?
No, personal injury compensation isn’t taxable. In the UK, you might be used to paying tax on things like income, inheritance, and other financial gains, so it’s a common misconception that you need to pay tax on injury compensation too. But generally, compensation for personal injuries and their effects is not subject to income tax, capital gains tax, or national insurance.
Another common misconception is that you need to pay tax on things like lost earnings, but this is only half true. If you claim compensation for lost earnings, benefits, or bonuses that you didn’t get a chance to earn because of your injuries, this is only taxable if it’s based on your gross income. However, when you make a personal injury claim, these figures should be based on your net income. This means that HMRC will consider it as tax-exempt. So, in short: You don’t need to pay tax on compensation for lost earnings if it’s based on your net income, not your gross income.
Some kinds of compensation are taxed, like compensation for investment loss or compensation for mis-sold PPI. We’ll explain the rule change that brought this into force a little later in the guide.
If you’re ready to start your personal injury claim, whether you were injured in a road traffic accident or an accident at work, we can help. Get in touch with our team today to learn more.
How Is Personal Injury Compensation Calculated?
Personal injury compensation is calculated by taking your accident and injuries into account, and looking at the effect that they have had on your life.
There are a number of steps that professionals use to calculate personal injury compensation. One of the tools used is called the Judicial College Guidelines (JCG), which is a document that lists different injuries beside guidelines for compensation. This covers both physical and psychological injuries, and helps professionals calculate compensation known as general damages.
General Damages
General damages are awarded to all successful personal injury claimants. This head of compensation covers:
- Your physical injuries
- Your psychological injuries
- The effect that these injuries have had on your quality of life
When general damages are calculated, the JCG can be taken into account, as well as:
- The severity of your injuries
- How long it will take you to recover
- Whether you can still enjoy your hobbies
Special Damages
The second head of compensation is called special damages. This covers the financial losses you’ve experienced as a result of your injuries, no matter how big or small.
For example, after suffering a severe brain injury, a claimant might need professional, round-the-clock care. This can be costly, and it shouldn’t have to be paid out-of-pocket. You could claim back the cost of this, including the current losses and future projected losses, under special damages.
This heading is calculated by considering:
- Bank statements, wage slips, and other evidence of financial losses
- How much you’ve spent on things like travel, childcare, and medical expenses
- Whether you’ve lost earnings due to taking time off work
- How much you’re expected to spend in the future because of your injuries
If you’d like to learn more about how personal injury compensation is calculated, or if you want to know whether or not you could make a claim, get in touch with our team today. One of our advisors can answer any questions you might have, from “Am I eligible for special damages?” to “Is compensation taxable?”
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Will The Accumulated Interest Be Taxed?
Yes, if your compensation accumulates interest up to a certain point, it will subject to income tax. The point at which your interest stops being tax-free depends on how much you earn.
You can earn interest on both general and special damages. In terms of general damage, you will generally receive a 2% rate of interest per annum, beginning on the date the claim is filed and ending when the payout is awarded.
It’s generally accepted that you aren’t supposed to financially benefit from special damages, since the main goal is to restore you to where you would’ve been if the accident hadn’t happened. Because of this, the rate of interest on special damages is usually lower than that of general damages.
Our advisors can provide more information on whether or not personal injury compensation is taxable when you get in touch.
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We pride ourselves on providing the best service possible for our clients.
Does The HMRC 2014 Rule Change Affect Personal Injury Claims?
No, the 2014 HMRC rule change does not affect personal injury claims. The new rules state that some forms of compensation are taxable, but this rule applies mostly to compensation for financial investments and purchases.
For example, the new rules apply to compensation for mis-sold PPI, investments, and pension compensation. They do not apply to:
- Accident at work claims
- Public liability claims
- Fatal injury claims
- Medical negligence claims
- Data breach claims
- Criminal injury claims
What If I Want To Invest My Compensation?
If you want to invest your compensation, then it will be taxed depending on what kind of investments you make. Once you invest your compensation, it becomes a financial holding, and is taxed as such.
To learn more and find out if compensation is taxable, contact our team today. Or, keep reading to learn more about us here at JF Law and how we can help.
How Can JFLaw Help Me?
At JF Law, we offer high-quality legal representation to clients nationwide, regardless of their financial circumstances. Our solicitors have decades of combined experience in all areas of law, and we’ve already recovered over £80 million worth of compensation for victims of negligence. When you choose to work with us, we’ll be with you every step of the way, from your first free consultation with one of our advisors to connecting you with a specialist to aid your long-term recovery.
As part of our commitment to providing top-tier help, regardless of financial status, all of our solicitors work on a No Win No Fee basis. They work under the terms of a Conditional Fee Agreement (CFA), which means you don’t pay their fees:
- Upfront
- While your claim is active
- At all, if the claim fails
If the claim succeeds, a success fee will be taken as a small percentage of your compensation. The percentage they are allowed to take is capped by law, which helps to make sure that you keep the larger share of what you receive.
Choosing to work with one of our solicitors means that you can focus on your recovery while they work on your case.
Contact Our Solicitors
Our team are here to help. They can offer you a free consultation, during which they will listen to your case and answer any questions you might have, including “Is compensation taxable?” After hearing more about your circumstances and your potential claim, they can then connect you with one of our solicitors.
Get started today by:
- Calling us on 0151 375 9916
- Making a claim online
More Information
For more information on making a personal injury claim:
- Learn about interim payments and how they can help you
- Get help making foreign injury claims
- Learn about the personal injury limitation period.
Or, for further resources:
- Get information from the financial ombudsman on taxing compensation
- Find out more about taxes and get help from HMRC
- Learn about income tax from GOV.UK
Thank you for reading our guide on the question, “Is compensation taxable?”
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