In this work, we investigate the toughness of an inter-layer Self-Reinforced Polypropylene/Carbon Fibre Polypropylene (SRPP/CFPP) cross-ply hybrid composite and devise strategies to improve two aspects of its damage tolerance: (i) increasing the energy dissipation capability and (ii) enhancing the impact damage tolerance. To this end, we introduced discontinuities in the form of laser-cuts across the fibres of the CFPP plies, tailoring two patterns of laser-cuts to meet each specific damage tolerance requirement. We conducted penetration impact and Double Edge Notched Tensile (DEN-T) tests. The DEN-T tests, analysed via the Essential Work of Fracture method, show that engineering the microstructure successfully diffused damage. This resulted in a great increase in energy dissipation capability — 90% higher than a reference non-engineered structure. Engineering the microstructure of impact samples has led to enhanced impact damage tolerance with increased energy dissipation at a sub-critical level and delayed critical failure.