Cell-free massive multiple-input multiple-output (mMIMO) has recently been proposed to improve cell edge performance. However, most prior works consider perfect hardware impairments (HIs), which are difficult to be achieved in practical systems. This paper studies the impact of HI in an uplink cell-free mMIMO system with both multi-antenna access points (APs) and multi-antenna user terminals (UTs) under the Weichselberger channel model.Firstly, we study a two-layer decoding scheme with local minimum mean-squared error or maximum ratio combining at the AP side and with optimal large-scale fading decoding in the central processing unit. We derive novel closed-form SE expressions and prove that the effect of HI can be mitigated in the case of UTs with multiple antennas. However, the achievable SE is constrained by the pilot contamination and pilot overhead. To this end, the superimposed pilot (SP) transmission method is considered in this paper, where all the coherence intervals are used for both pilot and data symbols transmission. Finally, numerical results verify our derived expressions and reveal the relationship between HI and the number of antennas per UT for different pilot schemes. Note that the advantages of SP over regular pilots disappear when the hardware quality decreases with multi-antenna UTs.