Is personal injury compensation taxable?
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You may have seen some reports in the press that money you receive as compensation is subject to tax, and that in the past few years HMRC have changed their position on what constitutes taxable income when it comes to compensation.
In terms of personal injury compensation any payment made is not taxable, regardless of how that payment is made.
Whether the compensation payout is awarded as a lump sum or as periodic payments, whether it’s as a result of a Court judgement or an out-of-court settlement – no tax will be deducted from your personal injury compensation.
The confusion around compensation and tax stems from awards made in respect of payment protection insurance (PPI) on insurance products, credit cards, loans and other lending products. This is because these types of products have interest payments (normally around 8% per year) that were also part of the compensation payout. As tax was not deducted from the source, many PPI Claimants found that they were required to declare the interest portion of the payout as income – and were then taxed on that.
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Is the interest paid on personal injury compensation taxable?
This is where things get slightly more complicated. First of all, lets reiterate exactly what is exempt from tax in terms of personal injury compensation:
- Any compensation or damages that are awarded for personal injury – paid either as a lump sum or periodically. Whether the payment was awarded by the Court or as an out-of-court settlement, it is still exempt from tax.
- Any interest on the settlement accrued up to the date the compensation was awarded for personal injuries. Any interest from the date of the injury (cause of action) to the date of the award is exempt from tax.
Let’s look at an example:
A Claimant sustained an injury on the 26 September 2013 and made a claim for compensation, which was settled on 6 June 2014. The compensation awarded was £30,975, which represented £30,000 for damages and £975 for the interest running from 26 September 2013 to 6 June 2014.
In this example no tax would be payable of the full £30,975 settlement as the interest represents what the Claimant would have accrued (with tax already deducted) had the £30,000 been paid on the day of the injury up to the day of the settlement.
What if there is a delay in payment of the compensation?
If the payment is delayed, for whatever reason, then any interest accrued following the date of settlement i.e. after the 6 June 2014 in our above example, could be subject to tax as this is likely to be paid as a gross sum with no tax already deducted.
This amount of ‘extra’ interest should therefore be declared as income and included on a tax return.
If you have any further questions about personal injury claims, please don’t hesitate to contact our team now to discuss your No Win No Fee claim:
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