Is my car accident settlement taxable'? – Here's what you should know

Is my car accident settlement taxable'? – Here's what you should know

A car accident is a traumatic event that changes your life completely.
Physical injury is the most evident consequence; however, there are other ways a vehicle collision affects your life.
Experiencing severe financial setbacks is one of them, as your medical bills can quickly pile up.
Plus, suppose your car was damaged in the car accident; you'll also have to pay for the repairs.
And, of course, there is also the emotional pain associated with such a distressing event.
Feelings of loss of control and autonomy may arise, and you may feel upset that you can't go about your daily life as you did before.
The emotional effects can be long-lasting, affecting your overall well-being.

As if that would not be enough, you also have to consider the legal aspects.
When suffering an injury due to someone else's negligence, you are entitled to claim compensation in the UK, but the process can be pretty confusing.
A concern you may have is whether your personal injury compensation is taxable, and as a result, you may hesitate to make a claim.
But we're here to tell you that's not something you should worry about, as tax is based on income, and car accident compensation doesn't belong to that category.

Common personal injury claims

There are different injuries you can claim compensation for, including:
  • Accidents that occur due to medical negligence;
  • Road traffic accidents;
  • Workplace accidents, like slips, trips and falls;
  • Accidents that happen due to faulty services or goods.


The personal injury claims process

It is vital to take action as soon as possible in personal injury claims cases, as there is usually a time limit of 3 years from the date of the accident.
For child injury cases, the 3-year time limit begins when the child turns 18.
A parent can also claim on behalf of an injured child while they are under 18.
The best thing you can do is hire a personal injury solicitor, as they can help gather evidence and interview witnesses.
Moreover, they can help you understand the legal process and guide you through it.

Proving liability in a personal injury claim is a critical step in the process.
Liability means determining that the party being held liable was at fault in some way so you can receive compensation.
For instance, in a vehicle collision, liability may be determined by investigating factors like mechanical failures, traffic violations, and road conditions.
On the other hand, in a workplace injury case, liability may be assigned to an employer who failed to provide proper training or safety equipment.
Once liability is established, the next step is determining how much compensation you can get by considering factors like the nature and extent of your injuries, lost wages, medical expenses, and suffering.

Compensation settlement tax

When a personal injury claim is successful, the compensation received typically includes two parts:
  • A settlement for the injuries caused covers things like lost wages and medical expense and is intended to compensate the victim for the harm they suffered from the accident.
  • Interest, which is calculated from the date of the accident up until the case is settled, is intended to compensate the victim for the time it took for the case to be resolved, as well as the financial losses incurred during that period.


Interest income is typically considered "taxable income".
However, in many countries like the US and the UK, the entity paying the interest is required to deduct and remit taxes on the interest payments before they are distributed to the recipient.
This is commonly known as withholding tax. As a result, the recipient of the interest income doesn't have to pay extra taxes on the interest received because the taxes have already been paid.
However, this isn't always the case, and it's important to mention the exceptions.
Suppose the claim is settled, but there is a delay in paying the compensation to the claimant.
In that case, the interest earned on the settlement amount during the delay period may be taxable because the interest is considered as earned on the gross settlement amount and not on the net amount after the tax is paid.

Investing compensation

Sometimes, people decide to invest their compensation – for instance, they may want to set up a building society account to keep their cash safe and earn interest.
In such a situation, the interest you get once investing your compensation may be subject to income tax. The tax may be withheld at source, meaning it is taken out of the interest earned before it is paid to you.
Or, it may be reported on your tax return and paid at that time.
Consult your bank's account manager if you feel confused, as they can provide more information and assist with any concerns regarding taxes on your investment interest.
Don't let misconceptions stop you from making a personal injury claim.
Often, victims of car accidents are reluctant to get the compensation they deserve due to common myths regarding personal injury claims.
One such misconception is that you can be taxed on your compensation amount, but as we've already discussed before, that's not true.
Moreover, people can also delay their claim process because they fear it will be too complicated.
However, that shouldn't prevent you from taking action.
With a personal injury attorney by your side, you'll successfully get through the process.
People also delay making a claim because they don't want to attend court.
However, most cases are settled out of court.
But if your case is among those rare ones which end up in court, it may be relieving to know that you don't have to attend in person, as the solicitor can represent you instead.

Don't hesitate to make a personal injury claim if you've suffered an injury due to someone else's negligent actions.
Doing this will help you recover from the emotional and financial damage so that you can get your life back on track as soon as possible.
Remember that you don't have to go through all of it alone, and a legal expert will always be more than glad to support you.