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Universal Credit (UC) is gradually replacing tax credits, and some other social security benefits. Universal credit is now available across the UK and HMRC state that it is no longer possible for anyone to make a brand-new claim for tax credits. The only exception is for certain people who are granted refugee status. Instead, people are expected to claim UC or pension credit depending on their circumstances.  Currently, existing tax credit claimants can continue to renew their tax credits and/or add extra elements to their claim. See our existing tax credit claimants page for more information. Our understanding is that the majority of existing tax credit claimants will move to either universal credit or pension credit by the end of the 2024/25 tax year. You can find out more about this in our universal credit section. 

Updated on 6 April 2024

Tax credit debt

When a tax credit claimant starts to claim universal credit, any tax credit overpayment debt that is outstanding is transferred to DWP (or DfC in Northern Ireland) and DWP (DfC) take over the recovery of the outstanding amount. This page explains how the transfer process works and who contact with questions.

4 small stacks of coins with a wooden block on top of each one, together the blocks spell out the word 'DEBT'.
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DWP/DfC have the legal power to recover tax credit debts. This can be in various ways such as reducing your ongoing payments of universal credit, through direct repayment from you or making deductions from your earnings.

Once a tax credit overpayment debt has been transferred to DWP or DfC, it remains with them even if you stop getting universal credit (or other benefits) and you should have any discussions about repayment arrangements or hardship with DWP or DfC.

Questions about transferred debts

When debts pass between HMRC and DWP/DfC, it can be confusing to know who to contact.

If you have any questions or concerns about the arrangements for repaying the debt, for example difficulties repaying, the rate of repayment, setting up arrangements, suspending repayments and questions about direct earnings attachments and so on, you should direct these to DWP or DfC.

If you have any questions or concerns about understanding how the debt occurred, challenging the reason for the overpayment, apportionment of the debt in joint cases and so on, you should direct these to HMRC.

The process of transferring tax credit debts

Once you make your universal credit claim and your tax credits award has stopped, HMRC should send you a letter (TC1131) titled ‘Your tax credits overpayments’. This letter tells you that your outstanding overpayment is being transferred to DWP (or DfC). As debts can transfer to DWP at different times, you may receive more than one TC1131. There is information about challenging tax credit overpayments in our tax credits overpayments section.

If there is still an outstanding appeal or dispute about the tax credit overpayment, HMRC have said they won’t transfer that debt until the appeal or dispute have finished.

Any time to pay arrangements, for example those set up by direct debit, that you already have with HMRC (or with a private debt collection agency working on HMRC’s behalf) should stop automatically. If you are repaying HMRC by standing order, you will need to cancel that with your bank.

Joint claims

Tax credits operate joint and several liability which means HMRC can ask one or both partners to repay debt from a joint claim. However if the couple separate, HMRC’s normal practice is to split the debt 50/50 (unless the claimants agree to a different split) and as long as one claimant pays back their 50%, HMRC won’t pursue them for the remaining 50% even if their ex-partner does not pay.

We understand that where claimants separate, HMRC will split the debt 50/50 before transferring the 50% to DWP/DfC for recovery from the single claimant’s universal credit. Each person should be notified separately of their part of the debt. Any dispute about the apportionment of the debt should be dealt with by HMRC.

Recovery rates in universal credit

Normally the most that can be taken from a universal credit payment to repay a debt is 25% of the universal credit standard allowance. This is the basic amount in an award before additional elements for things like childcare and housing costs are added.

There are some exceptions to this and we recommend you seek advice from a welfare rights specialist for help with any issues relating to deductions from universal credit awards.

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