IPTM5010 - Periodical payments in personal injury cases: introduction and overview

Introduction

Damages may be awarded to an individual as compensation for personal injury. These amounts are either determined by the court or agreed through an out of court settlement, and can be by the way of a lump sum or, alternatively, received in instalments by the injured person or another individual on their behalf.

In determining whether payments should be made as a lump sum or periodically, the main considerations taken into account are the cost of future medical or social care and any projected future loss of earnings.

In most cases, claims or actions for damages for personal injury are settled by way of payment of a lump sum to the injured person.

Detail on the tax treatment of lump sum payments is not dealt with in this manual. Guidance on these payments is located at CG13020 and Paragraph 12 Extra Statutory Concession D33.

Periodical payments

Where all or part of the damages are paid in the form of a continuing series of regular payments to the injured person for the rest of his or her life these are called periodical payments.

This type of arrangement, often referred to as a ‘structured settlement’, is more likely to arise in larger personal injury cases, such as road accident or medical negligence cases, and particularly where the injured person is a minor. Such settlements are often seen by the courts as more appropriate than lump sum settlements because they can be arranged to provide a certain level of income which is guaranteed for the life of the injured person.

Methods by which payments are made

Depending on the circumstances, there are several ways by which periodical payments of damages are made to the injured person:

  • by the defendant (the person liable for the damages), for instance in medical negligence cases involving the NHS, where payments are made through the NHS Litigation Authority
  • by an insurance company that acts for the defendant, for instance where a road accident is caused by a defendant who has third party liability insurance cover; this can be done by way of an annuity which is purchased for the injured person by the defendant or the defendant’s insurer
  • by the Motor Insurers’ Bureau (MIB), or through an annuity purchased by the MIB, where the injured person was injured in an accident caused by an uninsured or untraceable driver.

Since 1 April 2005, courts have the power to impose an order providing for periodical payments to the injured person without the consent of both parties involved.

Tax treatment and exemption

Periodical payments are treated as taxable income under ITTOIA05/S422 as annuities, and under ITTOIA05/S683 if they are other annual payments.

However, where the periodical payments are made under certain types of court orders from UK or foreign courts or settlement agreements or undertakings from the MIB as described in IPTM5020, none of the persons listed in IPTM5060 will be liable to income tax on the payments. These include the injured person. The payer will also not be required to deduct income tax when making the payments.

The relevant legislation covering this exemption is at ITTOIA05/S731 onwards.