Scroll down for the following headings:
- Tax credit overpayments - what are they?
How your entitlement fluctuates with changes in your circumstances and income during a tax year, and at the end of it the Revenue look at the whole year and decide whether you have been paid the right amount – or too little, or too much. - How do overpayments arise?
How your award is based on your circumstances now, and your income last year, then updated at the end of the tax year to reflect your income this year. This is one of the ways in which an overpayment can arise. - An illustration of what might happen
An example showing how this might work. - Can the Revenue recover payments before the year end?
How the Revenue have power to collect overpayments by reducing or even stopping your award during the year, and how they can ‘top-up’ payments if this causes hardship. - Can anything be done about overpayments in these situations?
Tax credit overpayments – what are they?
If you have claimed benefits, you will be used to being paid a fixed amount based on your income and circumstances at a particular time. Tax credits are not like that.
With tax credits, your entitlement changes to reflect your income and circumstances throughout the tax year, so sometimes you will not know the final amount to which you are entitled until the end of the tax year. At that time the Revenue take stock of your income throughout the year, taking into account any fluctuations, and also reviewing any changes in your personal circumstances – for instance whether you have been married, separated or divorced, entered or finished a relationship, had a baby, changed your work patterns, or one of you has gone abroad for a long time.
Then they compare what they have paid you with what you should have received. If you have had less than your entitlement, the rest is paid to you in a lump sum. If more, the Revenue may ask you to repay the balance.
That balance is known in tax credits-speak as an ‘overpayment’. And because a tax credits year is the same as the tax year – 6 April to 5 April – this process of reckoning for the 2003-04 tax year is less than one month away.
How do overpayments arise?
Tax credits overpayments are completely different from overpayments of benefits, and governed by different rules. The DWP can only require you to repay an overpayment of benefits if it arises because you made a material misstatement, or omitted to declare a material fact, in support of your benefits claim. An overpayment of tax credits, on the other hand, arises because the first award of tax credits is only provisional. It is initially based on your circumstances at the time of your claim, and your income for the previous tax year.
Thus, awards for 2003-04 were initially based on personal circumstances – whether single or in a couple, how many children, whether anyone in the household has a disability, and so forth – and income for the tax year 2001-02 (which is deemed to be the ‘previous year’ in relation to 2003-04). Awards for 2004-05 will be based on your circumstances at the date of claim, and your income for 2003-04.
As your income goes up and down, or your circumstances change, so the level of your entitlement alters. At the end of the year, the income used to assess your award is updated to that of the current year, so that (for example) your final 2003-04 award will reflect your actual income for 2003-04. If there have been changes in your income during the year, then your actual income of the current year is spread evenly over the whole year and used to arrive at your final award.
If your income for the current year exceeds your income for the previous year by £2,500 or less, the increase is not taken into account in deciding your final award for the current year. If it is more than £2,500, only the excess over £2,500 is taken into account. Because of this income rule, even if you tell the Revenue all the right things at all the right times, it is still possible to run up an overpayment.
An illustration of what might happen
Let us illustrate this by means of an example.
Say that you and your partner made a joint claim for tax credits in 2003-04. In the first six months of the year, only one of you was working, and your income last year was £12,000 a year – i.e. for the first six months of this year your award will be based on joint income of £6,000 and you receive tax credit based on this low income figure.
Half way through the tax year your partner started working, also earning £12,000 a year, so your joint income for the second half of the year becomes £12,000.
You tell the Revenue about this change straight away. They will ignore the first £2,500 increase in income but the income increase is still large enough to mean that your award for the rest of the year is reduced. But because of the way the regulations work, your income for the whole tax year is recalculated, and spread evenly over both six months periods, so for the first six months you are deemed to have earned £9,000, not £6,000. Again, even with the £2,500 disregard, this is bound to make a difference to your entitlement for those six months, and could mean that an overpayment will have arisen in that period.
Depending on the level of your continuing entitlement that overpayment may not be fully recoverable, leaving you with an overpayment at the year-end through no fault of your own.
The Revenue seem reluctant to acknowledge this point in some of their published materials on tax credits, preferring to believe that overpayments only arise because either you make a mistake, or they do.
Can the Revenue recover overpayments before the year end?
Many people have already had problems with overpayments.
The law gives the Revenue power to reduce or even stop your tax credit award straight away, without waiting for the year end. This means that they can recover an overpayment from your continuing entitlement for the rest of the year.
Some low income claimants have found that this puts too much of a strain on the family budget and the Minister who introduced the Tax Credits Bill to the House of Commons in January 2002 did say that he trusted the Revenue to use their powers to recover overpayments ‘fairly and sensibly’.
The Revenue have therefore introduced a system of ‘top-up payments’ to correct the deficiency in their computer system which automatically recovers the overpayment from the continuing award.
The amount of top-up payments you are eligible to receive depends upon the level of your continuing entitlement to tax credits (ignoring the overpayment) and therefore on the level of your income. At present, you do not get the top-up payments automatically; you have to ask for them.
- If your income levels were such that you were receiving maximum tax credits, you will get 90% of your award by way of top-up. Thus, the overpayment recovery will only take away 10%.
- If your income level was above that amount, you will be paid 75% of your award: ie the overpayment recovery is 25%.
- But if you were only receiving the family element of child tax credit (£545 a year), you will not be eligible for any top-up and all your award can be taken away in overpayment recovery.
It is important to note that these rules on top-up payments do not alter the fact that you are still expected to repay the full amount of the overpayment over time.
Can anything be done about overpayments in these situations?
Unfortunately the answer to this is ‘no’. The overpayment arises from the way that the income rule works, and the Revenue have said that they have no intention of changing this rule. It was a rule introduced as part of the integration of tax and benefits and is viewed as being no different from the rule which allows someone only working one month in a tax year a full personal allowance and a full starting and basic rate band for tax. The only way of avoiding it is to ensure that the income increase is less than £2,500, perhaps by taking the new job/pay rise closer to the 6 April.
The one case in which you can argue that the Revenue should not collect an overpayment is when they have made a mistake (an ‘official error’) and we shall cover this in a later article on this website.
(08-04-2004)
Contact Name: Robin Williamson (Contact tel: 0844 579 6700, Fax: 0844 579 6701)
Relevant Link: Second article on overpayments
