When you’re dealing with a personal injury claim, one of the most pressing concerns—especially when a settlement offer is on the table—is whether the compensation will be taxed. After all, it’s not uncommon for personal injury settlements to run into tens or even hundreds of thousands of pounds. Understanding the tax implications is essential before accepting any offer.

The Short Answer? Usually Not.

The good news is that in most cases, personal injury settlements are not taxable. But as with many areas of law, the detail matters. The total compensation figure may look like a single lump sum, but it’s typically made up of several different “heads of loss.” These are distinct categories of damages that are claimed individually—such as pain and suffering, lost earnings, care, treatment costs, and so on—and then paid out together upon settlement.

Let’s explore how the tax rules apply to each.

Pain, Suffering & Loss of Amenity (PSLA)

This is the heart of most personal injury claims—the compensation for the injury itself. It covers the pain you’ve endured, your suffering, and the impact the accident has had on your quality of life.

This part of your settlement is completely tax-free.
It is specifically exempt under the Taxation of Chargeable Gains Act 1992, which means whether you receive £5,000 or £100,000 for your injuries, you won’t owe a penny in tax on this portion.

Loss of Earnings – Net, Not Gross

Loss of earnings is another common head of claim. When calculating this, the law looks at what you actually took home after tax and National Insurance—your net earnings—not your gross salary.

Here’s how it works:

• If you earned £2,000/month before the accident but took home £1,500 after deductions, and you're now unable to work at all, the claim is for the £1,500.

• If you can still work part-time and now earn £500/month, then the claim is for the £1,000 difference—still based on net pay.

Because you’re only recovering your net loss, there’s no further tax to pay.

What About Benefits You've Received?

Things become more complex if you’ve received state benefits—such as Personal Independence Payment (PIP) or a Mobility Allowance—as a result of your injuries. If your final settlement includes compensation for things like care, mobility support, or assistance (which those benefits were also meant to help with), there can be an offset.

For example:

If you’re awarded £5,000 for care and assistance in your claim, and you’ve already received £3,000 in relevant benefits, that £3,000 may be deducted from your settlement, leaving you with £2,000 for that particular head of loss.

This isn’t taxation in the conventional sense—but rather an adjustment to prevent you from being compensated twice for the same thing. It’s always assessed on a case-by-case basis, considering the nature of the benefits received, what’s claimed, and what your medical evidence supports.

The Bottom Line

• PSLA (pain and suffering): ✅ Not taxable

• Loss of earnings: ✅ Claimed net, so not taxable

• Benefits overlap: ⚠️ Possible deductions—not tax, but offsets

It’s essential to remember that not every claim is the same. The best way to know where you stand is to speak to someone who understands the details of your case and can guide you with confidence.

Thinking of Starting a Personal Injury Claim? Get Clear Advice First.

Before you start your claim—or even speak to your insurer—it’s important to understand how your compensation will be calculated and whether anything might affect the final amount you receive. That includes potential deductions or interactions with benefits you've been receiving.

At Inson Legal Limited, we offer straightforward, honest legal advice from day one. No call centres. No middlemen. Just direct access to a qualified solicitor who genuinely understands the process—and has been through it personally.

If you want guidance before beginning your personal injury claim,

contact Chris Hutchinson today:

📞 01204 263 147
📧 mail@insonlegal.co.uk

Are Personal Injury Settlements Taxable? What You Need to Know Before You Claim