In recent years, the automotive and aerospace industries have accelerated interest in the use of advanced carbon fibre-reinforced composites as a primary structural material because of their great potential. However, unidirectional fibre-reinforced laminates have limitations such as low inter-laminar crack propagation resistance, low delamination resistance, low impact damage resistance, and poor post-impact damage tolerance due to the lack of through-thickness reinforcement. Z-pinning can overcome these problems as it is the only technique suitable for reinforcing prepreg laminates in the through-thickness direction. In the present study, the realistic RVE was generated from the idealization of the micro-structure. The finite element model was developed by considering a pure resin-rich region, an in-plane fibre waviness for 0.28 mm diameter, 2–5% volume fraction, and 90 \(^{\circ }\) inclination angle of a Z-pin. A Continuum Damage Mechanics (CDM)-based damage model was developed to predict the micro-damage initiation based on the von Mises criterion for isotropic material failure and the Tsai–Wu criterion for transversely isotropic material failure. Further, a CDM-based isotropic hardening plasticity damage model for matrix material was developed to predict damage progression based on elasticity and plasticity governing equations (yield function, equivalent plastic strain, plastic flow law, plastic dissipation). The backward Euler and Newton’s methods are used to simplify the iteration algorithm. In addition to the theories and criteria that derive the damage process, the material properties/stiffness degradation method (MPDM) was carried out throughout the finite element analysis.