Is Compensation Taxable?

Compensation is not always the first thing that springs to mind when you have an accident and suffer a personal injury.

But once you begin the process of getting justice for what happened to you, the concept of compensation could become more real – and that could get you thinking about whether it would be taxed.

Would compensation result in tax?

If you’re worried that your compensation will cause you to lose money in tax, you won’t have anything to worry about. The money that you receive as compensation for the pain and suffering you experience after an injury stays yours. Whether you receive one lump sum or multiple amounts, including interim payments, you won’t be taxed on your compensation.

This is because tax is levied on income and compensation is not considered as earnings. The government has put legislation in place declaring that if you receive personal injury compensation, you won’t have to pay any tax on it. This will help you get back to the position you were in before the accident ever happened – exactly what compensation is supposed to do.

When tax applies

There are times when tax might be levied on compensation to accident victims. In 2014, HRMC made certain types of compensation taxable – although personal injury compensation was not affected by this.

If you were paid compensation by an individual or organisation in order to stop you taking legal action, you could have to pay tax. But typical cases of personal injury, in which a solicitor helps you obtain compensation through a legal claim, are not counted here.

Personal injury trust

If you’re worried about the effect a compensation payout will have on your finances, you might want to consider a personal injury trust. This is useful when you are claiming benefits and are concerned that the compensation you’re awarded will have an impact on what you are entitled to.

In most cases, your entitlement to certain benefits will depend on how much money you have in savings. If you receive a lump sum in compensation, you could therefore lose your entitlement to benefits. Keeping your compensation in a personal injury trust keeps it separate, meaning that it cannot be taken into consideration when you’re being evaluated for benefits.

A solicitor will be able to help you through the process of setting up a personal injury trust.

To find out more about the details of accident compensation, our friendly claims advisors can talk you through your individual situation and options. Just give us a call, request a call back or start a claim online.