Personal injury compensation is not taxable in the UK. Both general damages (for pain, suffering and loss of amenity) and special damages (for financial losses such as lost earnings, treatment costs and care) are exempt from income tax and capital gains tax under section 751 of ITTOIA 2005. However, a lump-sum award can affect your entitlement to means-tested benefits — a personal injury trust can protect against this.
One of the most common questions people ask after receiving a compensation offer is whether they will have to pay tax on it. The short answer is no — personal injury compensation is tax-free. But there are nuances: interest earned after the money is in your bank account is taxable, and a large lump sum can push you over the capital threshold for benefits such as Universal Credit. This guide explains the tax position clearly. We are an independent information resource, not a law firm, and we do not provide tax advice — always consult HMRC or a tax adviser about your specific circumstances.
Why compensation is tax-free
The exemption comes from section 751 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), which provides that damages or a settlement payment received for personal injury or death are not chargeable to income tax. The exemption covers:
- General damages — compensation for the injury itself, pain, suffering and loss of amenity.
- Special damages — compensation for financial losses caused by the injury, including lost earnings (past and future), treatment costs, care, travel and other out-of-pocket expenses.
- Interest on damages — interest awarded by the court as part of the judgment is also exempt.
There is no capital gains tax either. HMRC’s guidance (BIM45520) confirms that compensation for personal injury is not a chargeable gain.
Summary: what is and is not taxable
| Component | Taxable? | Notes |
|---|---|---|
| General damages (pain, suffering) | No | Exempt under ITTOIA 2005 s.751 |
| Special damages (lost earnings, care, costs) | No | Exempt — even though the earnings would have been taxed had you worked |
| Interest awarded as part of damages | No | Exempt under ITTOIA 2005 s.751 |
| Periodical payments (PPOs) | No | Tax-free for life under Damages Act 1996 (as amended) |
| CICA tariff awards | No | Criminal injuries compensation is exempt |
| Interest earned in your bank after receipt | Yes | Taxable as savings income in the normal way |
| Investment returns on invested compensation | Yes | Dividends, rental income, capital gains on investments are taxable normally |
Lost earnings — paid gross
This surprises many people. If you had continued working, your salary would have been subject to income tax and National Insurance. But when lost earnings are recovered as special damages in a compensation claim, they are paid gross (without deduction of tax or NI). HMRC treats the entire payment as exempt personal injury compensation, not as employment income. Your solicitor does not deduct PAYE.
Structured settlements and periodical payments
For serious injuries requiring lifelong care, compensation may be structured as periodical payments (PPOs) under the Damages Act 1996 (as amended by the Courts Act 2003). PPOs provide regular, indexed, tax-free payments for life. This is one of their main advantages over a lump sum: the income from a PPO is never taxable, whereas if you invested a lump sum yourself, the investment returns would be.
See our guide on how compensation is paid for more on lump sums versus PPOs.
Effect on means-tested benefits
While compensation itself is not taxable, a lump sum received as damages is counted as capital for means-tested benefits. This can affect:
- Universal Credit — capital over £6,000 reduces your entitlement; capital over £16,000 disqualifies you entirely.
- Housing Benefit and Council Tax Reduction — similar capital thresholds apply.
- Income-related ESA, Income Support, Pension Credit — capital above £6,000 (£10,000 for Pension Credit) reduces payments, and above £16,000 you lose entitlement.
Non-means-tested benefits such as PIP, DLA and contribution-based ESA are not affected by capital. See our guide on compensation and benefits.
Personal injury trusts
A personal injury trust is a legal arrangement that holds your compensation so it is disregarded when assessing your entitlement to means-tested benefits. The key rules are:
- The trust must be set up within 52 weeks of receiving the compensation to benefit from the DWP disregard.
- At least one trustee must be someone other than the beneficiary (usually a family member or solicitor).
- The funds must come from the personal injury award.
- The trust can be a simple, low-cost arrangement — many solicitors set one up as part of the settlement process.
✓ Ask your solicitor about a trust
If you receive means-tested benefits, ask your solicitor about setting up a personal injury trust before the compensation is paid into your personal bank account. Once the money is in your account, the 52-week clock starts.
CICA awards
Compensation received from the Criminal Injuries Compensation Authority is also tax-free. The same benefits considerations apply — a lump-sum CICA award can affect means-tested benefits, and a personal injury trust can be used in the same way.
Do I need to declare it?
You do not need to declare the compensation itself on your self-assessment tax return. However, if you invest the compensation and it generates taxable income (bank interest above your personal savings allowance, dividends, rental income, or capital gains), you must declare that investment income in the normal way.
Frequently asked questions
Is personal injury compensation taxable?
No. Personal injury compensation for pain, suffering and loss of amenity (general damages) is exempt from income tax and capital gains tax under ITTOIA 2005 section 751. Special damages for financial losses are also tax-free when received as part of a personal injury settlement or award.
Is interest on compensation taxable?
Interest on general damages and on special damages for pain and suffering is tax-free. However, once compensation is received and deposited in a bank, any interest earned on the lump sum in your bank account is taxable in the normal way as savings income.
Are structured settlements taxable?
Periodical payments (PPOs) ordered by a court or agreed in a structured settlement are tax-free for life under the Damages Act 1996 as amended. The payments are designed to provide ongoing, tax-free income to meet the claimant’s future needs.
Does compensation affect my benefits?
Yes, a lump-sum award can affect means-tested benefits such as Universal Credit, Housing Benefit and Council Tax Reduction. Capital over 6,000 pounds reduces Universal Credit entitlement, and capital over 16,000 pounds disqualifies you entirely. A personal injury trust can protect your compensation from being counted as capital.
What is a personal injury trust?
A personal injury trust is a legal arrangement that holds your compensation so it is disregarded when assessing your entitlement to means-tested benefits. It must be set up within 52 weeks of receiving the compensation to benefit from the disregard under DWP rules.
Is the lost earnings part of compensation taxable?
No. Although lost earnings would have been taxable had you earned them, when they are recovered as special damages in a personal injury claim they are paid gross and are exempt from tax. HMRC does not tax compensation that replaces lost earnings.
Does compensation count as income for child maintenance?
A lump-sum compensation award is not treated as income by the Child Maintenance Service. However, periodical payments (PPOs) may be considered income. The CMS has specific rules, and you should check the current guidance or take advice.
Do I need to declare compensation on my tax return?
You do not need to declare the compensation itself. However, if the compensation is invested and generates income (dividends, interest, rental income), that investment income is taxable in the normal way and should be declared.
Get help from official, free sources
- HMRC — guidance on tax treatment of damages (BIM45515–BIM45525)
- GOV.UK — Universal Credit capital rules and personal injury trust disregard
- Citizens Advice — free, impartial guidance on benefits and tax
- Solicitors Regulation Authority (SRA) — check a solicitor is regulated
Related guides: how compensation works, what compensation covers, special damages explained, how compensation is paid, compensation and benefits.