Do I Have To Pay Tax On My Personal Injury Claims?

By: admin | Date: 2020-09-17

Personal injury claims are a great way to cover the financial losses one had to bear for being in a car accident. They incorporate all the expenses of the accident that include your car repair expenses, medical and travelling expenses, loss of earnings, and PTSD etc. Almost everyone is familiar in the UK that they can get personal injury claims if the fault was not their own. But you may be thinking that you may have to pay tax on your personal injury claims.

There are a lot of people in England and Scotland who think that they might have to pay a share of their personal injury claims money to the government in the form of a tax. Is it really true? Will you really be liable for giving a tax on your amount of personal injury claims? I get tons of questions from the victims of the accident asking me whether their injury claims are taxable or not. So I decided to provide you with complete guidance about the tax on personal injury claims.

Will I Have To Pay A Tax on Personal Injury Claims?

If you are wondering that you may have to bear the tax expenses after getting personal injury compensation, you should not be. It is because personal injury claims are not taxable. You do not have to pay anything to the government out of the money you got compensation for your injuries. When it comes to getting personal injury claims, there are two main types of claims settlements.

  • Out of court settlements
  • In court settlements

Mostly, cases, whether they are car accident claims or a whiplash injury claim, reach the courts and are decided after going through a hassling procedure consisting of months (years in some cases). No matter what type of settlement your case ends on, there is not a single penny of tax you are liable to pay. It is the compensation money for the expenses you bore after the accident. So it is tax-free.

Will I Have To Pay Tax If Compensation Is In Instalments?

Sometimes, you do not get compensation in lump sum amounts. Your amount of compensation is paid in instalments. So some people think that they may be liable to pay the tax if their amount is in instruments. But that is not true at all. The type of payment method does not affect the laws of taxability of personal injury claims. Whether you get a lump sum amount or receive it in chunks, there is no need to pay your tax on it.

Will I Pay Tax On My Interest of Compensation?

When you make a claim after an accident, you are given compensation in two different forms.

  • The compensation for your injuries and other expenses
  • The interest for the duration of your claims process

Interest may be added in your amount of compensation from the time of your injury to the settlement date. This interest is already tax deducted. So you do not need to pay any tax in this type of interest.

For instance, you got into an accident and conceived injuries on 15th March 2019 and your case was settled on 15th August 2020. You get £30,000 as your compensation for the injuries and other expenses. While received £750 as interest for one and a half years between the accident and the date of settlement. You will be entitled to get a total of £30,750 as your compensation that will be tax-free.

Tax On Interest If The Compensation Is Delayed

When you make any type of personal injury claim, you may not get the amount of compensation immediately after winning your case. There are some situations where it takes time to deliver the amount of compensation to the victim. If this happens, interest starts to get accumulated on your amount of compensation.

This amount of interest is paid by the insurance company to the victim in addition to the amount of compensation. This amount of tax keeps increasing your compensation money until the other party delivers it to your account. The longer it takes to transfer the amount to your account, the more the amount of interest will be.

If the compensation gets delayed due to some reason and you receive interest on this amount, you have to pay tax. You only have to pay the tax on the amount of interest you received due to the delay in payment. The principal amount and the interest you previously received for the claim’s duration is still tax-free.

Let us take an example where you got £30,750 as compensation in a road accident claim on 15th August 2020. But due to some reasons, you were not given this amount at that time and the interest started to get accumulated at it. After four months, you got your compensation worth £30,950 on 15th December 2020.

£30,750 is the principal amount of the claim (including the previous interest) while £200 is the interest amount for the period of 4 months. Now you will only have to pay a tax on £200 of interest you received due to the delay of the payment.

What If I Invest My Compensation?

As you have already paid your medical and other expenses before even getting your compensation. So, you may be thinking of investing this compensation money in some business to generate some profit out of it. Let us say that you have invested your amount of compensation and generated a profit or earned interest on it. Now you will be liable to pay the tax on the profit you have generated out of this investment. You are not liable to pay the tax on the original amount but only on the profit or interest earned on it.

So there is no need to pay any tax on any type of personal injury claim. But generating interest from investing the amount of compensation or interest earned due to late payment of claim money is taxable. So there is no need to fret about paying the tax on your amount of compensation.

Tax On My Personal Injury Claims
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