In this work, three-dimensional (3D) finite element simulations were undertaken to study the effects of lightning strikes on the microscale behaviour of continuous fibre-reinforced composite materials and to predict and understand complex lightning damage mechanisms. This approach is different from the conventional mesoscale or macroscale level of analysis, that predicts the overall lightning damage in composite laminates, thus providing better understanding of lightning-induced thermo-mechanical damage at a fundamental level. Micromechanical representative volume element (RVE) models of a UD composite laminate were created with circular carbon fibres randomly distributed in an epoxy matrix. The effects of various grounding conditions (one-, two-, and four-side grounding), fibre volume fractions ( V f = 55, 60%, and 65%), and peak current amplitudes (10, 20, and 40 kA) on microscopic damage in RVE models were characterised to understand fibre, epoxy matrix, and fibre-matrix interfacial damage associated with a lightning strike. Thermal damage, estimated based on epoxy matrix decomposition temperature, was largely constant up to 20 kA before increasing significantly at 40 kA. Severe thermal damage steadily decreased with increasing V f. Thermo-mechanical damage was predicted using a ductile plasticity model with Drucker–Prager yield criterion for epoxy matrix failure, and cohesive surfaces for fibre-matrix interface debonding. Thermal strain had the largest contribution to thermo-mechanical damage, while dynamic pressure loading was negligible in all RVE models. The RVE model proposed in this work, to the best of the authors’ knowledge, is the first model predicting lightning-induced fibre-matrix interfacial damage.