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HMRC internal manual

Insurance Policyholder Taxation Manual

Periodical payments in personal injury cases: introduction and overview

Structured settlements in personal injury cases

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. But in some cases all or part of the damages are paid in the form of a continuing series of regular payments called ‘periodical payments’ to the injured person for the rest of his or her life.

This type of arrangement, often referred to as a ‘structured settlement’, is only likely to arise in larger personal injury cases, such as road accident or medical negligence cases, 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.

From 1 April 2005, courts have the power to impose an order providing for periodical payments to the injured person without the consent of the parties. Before this time, an order providing for periodical payments could only be made if both parties agreed.

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
  • 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.


Tax treatment and exemption

On first principles, periodical payments are annual payments which would be taxable as income - under ITTOIA05/S422 if they are annuity payments 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 is in ITTOIA05/S731 onwards. This is a tax law rewrite of ICTA88/S329AA and ICTA88/S329AB and superseded these sections on 1 April 2005.

The general exemption provided under this legislation has only been in place since 29 April 1996 and any periodical payments made before that date are likely to be taxable.

Further reference and feedback IPTM1013