Tax credits overpayments
Overpayments and underpayments are a normal part of the tax credits system. This is because tax credits entitlement is not decided until a final decision is made, usually after the end of the tax year for which the award has been given. This you can have been paid more, or less, tax credits than you were entitled to receive. Here we explain what to do if you have a tax credits overpayment.
Content on this page:
Introduction to tax credit overpayments
The tax year runs from 6 April in one year until 5 April in the next year.
To start with, the award is based on your current circumstances (for example, your situation with work or the number of children you are currently supporting) but using your income from the previous tax year.
It is possible in certain circumstances to have your award changed and based on a current year estimate if you think that your income will be less than the previous year. However, it is possible for an overpayment to occur if your estimate turns out to be too low.
After the current tax year has ended, when your income and circumstances and any changes during the year are known in full, it is then considered for adjustment. This adjustment process (when the award is finalised, usually as part of the renewal process) can, but does not always, throw up underpayments or overpayments.
How overpayments occur
Overpayments occur when you receive more tax credits than you are entitled to for the year.
The law allows HMRC to ask you for any overpayment back, no matter how the overpayment was caused. It also allows HMRC to adjust your award during the year in order to reduce or eliminate any likely overpayment.
HMRC may decide you were not entitled to payments of tax credits they have already made to you, that will also create an overpayment.
The law gives HMRC complete discretion over whether to collect any overpayment, and how much of it to collect, or whether and by how much to adjust an award during a year in order to prevent an overpayment arising.
Why tax credit overpayments happen
Tax credits are designed to follow changes in income (to an extent) and personal circumstances. There are a number of reasons why an overpayment might arise following such a change:
- A large increase in your annual income from one year to the next. (This was less likely to occur when the disregard was £25,000 but became more problematic when the disregard reduced to £5,000 and then further to the current £2,500.)
- You are late reporting a change in circumstances that causes their entitlement to fall – perhaps a drop in working hours, a change of household or a child leaves full-time education, etc.
- You report an estimated current year income which turns out to be too low.
- HMRC delay processing a reported change.
- You make a mistake in your own favour on your claim form or renewal form.
- HMRC make a mistake, whether human or computer error, or give you erroneous advice which they act upon to your detriment.
- An award is adjusted downwards following an investigation by HMRC.
- The payments you receive in the first few months of a new tax year (from April), before the renewal forms have been processed, are too high.
- You fail to fail to complete your renewal forms on time.
Understanding your overpayment
It is not always clear how an overpayment has happened. You are entitled to ask HMRC to give you an explanation of how the overpayment happened and how it has been calculated although they will not stop asking you to pay back the money while you do this.
Even if the overpayment has been passed over to DWP/DfC for recovery – questions about why the overpayment occurred or challenges to the overpayment must be made through HMRC.
There are three ways to challenge an overpayment. Any challenge must be made directly to HMRC, even if the overpayment has been passed to DWP/DfC for recovery (see text under the heading ‘Repaying DWP/DfC directly).
- Official error challenge
There are strict time limits for each of these that run from the date of the final award notice from the year of the overpayment. For appeals this is one month (extended to 13 months if a late appeal is accepted) and for disputes this is 3 months. Official errors can be dealt with up to 5 years after the decision date, but there are strict requirements about what counts as an official error under these rules. There is more information on our website for advisers.
You may also be able to reduce the amount of the overpayment through notional offsetting (explained further below).
If your overpayment is from some time ago, you may be out of time to challenge it via any of these routes.
Everybody has the right to appeal to an independent tribunal against HMRC's decision on how much tax credits they should receive, which includes an award that shows an overpayment. You will have to ask HMRC for a mandatory reconsideration of the decision before the appeal can go to an independent tribunal. You should make use of the appeals process if you receive an award notice showing an overpayment that you do not think is calculated correctly (including if you do not understand how it arose or HMRC cannot give you a satisfactory explanation).
On the other hand, if the decision which has caused the overpayment is correct and HMRC decide to recover it from you, then you do not have any independent right of appeal against HMRC's decision to recover it.
However, there is a process to follow if you agree with the way the overpayment is calculated but you don’t agree that you should have to repay it because you believe it arose through HMRC's own mistake. The process is called the ‘dispute process’.
The dispute test is based on a series of responsibilities on the part of both the claimant and HMRC. The full list of responsibilities can be found in the COP 26 on GOV.UK.
- If the claimant meets their responsibilities, but HMRC fail to meet theirs – the overpayment might be written off.
- Similarly, if HMRC meet all their responsibilities but the claimant fails to meet all of theirs – the overpayment will not be written off.
- Finally, if both sides fail to meet some of their responsibilities, there is likely to be a partial remittance of the overpayment based on the part that was apportioned to HMRC failing in their responsibilities and HMRC can agree that only part of the overpayment must be repaid to them.
You should put your case in writing, preferably by using the form TC846 provided by HMRC. The form is available on the GOV.UK website and you can send your completed dispute form to HMRC either by post or online.
There is a three-month time limit for disputes. The time limit runs from the date of the final award notice, the date that a final decision will be made for auto-renewal cases (generally 31 July) or the date of notification of the outcome of an appeal hearing. More detailed information about the time limit can be found on our Revenuebenefits website.
HMRC do not suspend recovery of the overpayment while they consider the dispute. It is important that you speak to HMRC’s Debt Management team about repaying the overpayment while the dispute is considered. In some cases, HMRC may suspend recovery action or court action (if the recovery action has gone that far) whilst the dispute is considered but they are not obliged to do so. If the dispute is successful, then HMRC should refund any money that you have repaid back to you.
If you disagree with HMRC’s decision about recovering the overpayment, you have the right to refer the matter to the Adjudicator's Office and from there to the Parliamentary Ombudsman, once you have exhausted HMRC's own complaints procedures. But you do not have the right to appeal to a tribunal about recovery of an overpayment, except in the very small number of cases where an application to the High Court for judicial review of HMRC's decision might be made.
It is important to note that current HMRC policy is not to suspend recovery of the overpayment while the complaint procedures are being pursued, nor while any explanation of an overpayment is sought prior to a dispute.
Sometimes, tax credit claimants who form a couple or who become single, either because they separate or because one partner dies, are slow in reporting the change to HMRC. Yet in many cases, if they had acted promptly, they would have continued to be entitled to tax credits, albeit in a different capacity.
HMRC have a notional offsetting policy that means tax credits recipients who start to live together, or who become single after being part of a couple, but are late reporting the change to HMRC, can reduce the overpayment on their old claim by whatever they would have been entitled to had they made a new claim promptly. At present, it appears that HMRC will not allow notional offsetting where the person acted ‘fraudulently’ or where they have had notional offsetting on a previous claim.
To request notional offsetting, you should contact HMRC’s tax credit helpline to ask for your case to be referred to the tax credits ‘notional offsetting (or notional entitlement)’ team in HMRC. From Autumn 2016, HMRC have been actively applying notional offsetting and should be identifying cases where it might apply. Originally, in order to access notional offsetting HMRC say that you needed to have made a new tax credit claim (either a joint claim if your previous claim was single or a single claim if the previous claim was joint).Now that HMRC state it is no longer possible to make a brand new claim for tax credits, notional offsetting is available even if the new claim for tax credits is not possible, HMRC will ask for information in order to help to calculate what the tax credit entitlement would have been if a claim was possible. Anyone who thinks notional offsetting should apply should contact HMRC.
HMRC policy for tax credits is generally not to charge a penalty where the failure to report has resulted from a mistake or misunderstanding. If HMRC think you have been negligent in not reporting and you are left with a net overpayment even after notional entitlement has been applied, you may be charged a penalty, against which you can appeal. If your failure to report is dishonest, the penalty may well be substantial.
Paying back tax credit overpayments
How you pay back tax credit overpayments depends on whether you are still getting tax credit payments or not.
Recovery from ongoing tax credit payments
HMRC normally try to recover an overpayment by reducing future payments of tax credits. If you receive the maximum amount of tax credits because you are on a very low income or on certain means-tested benefits, HMRC may not reduce your ongoing payments by more than 10 per cent in order to recover an overpayment.
If you do not receive the maximum amount of tax credits but your payments are higher than the family element of child tax credit (around £545 a year in most cases) and your household income is £20,000 or less, then your ongoing tax credit payments can be reduced by up to 25 per cent.
If you do not receive the maximum amount of tax credits but your payments are higher than the family element of child tax credit (around £545 a year in most cases) and your household income is more than £20,000, then your ongoing tax credit payments can be reduced by up to 50 per cent.
If you are in receipt of the family element only, HMRC can recover the overpayment in full you’re your ongoing award.
Outstanding overpayments from old tax credit claims which have ended can also be recovered from new ongoing claims, this is referred to as cross-claim recovery. Cross-claim recovery can apply in these situations:
- A joint ongoing claim can be reduced to recover debts from old single claims of one or both members of the couple.
- A single ongoing claim can be reduced to recover debts from an old single claim of the same person.
- A joint ongoing claim can be reduced to recover debts from an old joint claim if the same two people are involved in each claim.
If you have a change of circumstances during the year which reduces your award and HMRC think, because of the payments you have already had by that point, you will have an overpayment by the end of the year, HMRC can reduce or even stop the scheduled ongoing payments after the change of circumstances to prevent (or reduce) the overpayment.
If HMRC reduce ongoing tax credit payments by too much
If the amount that HMRC are recovering from an ongoing award leaves you unable to meet your essential living expenses, then you can ask HMRC to consider hardship.
You can do this using the online form via the GOV.UK website or by contacting HMRC. You can contact the tax credits helpline (0345 300 3900 or NGT text relay if you cannot hear or speak on the phone: dial 18001 then 0345 300 3900) and tell HMRC you are suffering hardship. HMRC should refer the case to the hardship team who will then send you a form asking for your income and expenditure details.
If you have less than £20 a month disposable income, HMRC may be able to reduce the percentage that being repaid from your tax credits payments each month or suspend recovery temporarily.
Recovery of overpayments when no longer getting tax credits
If you no longer receive tax credits, HMRC may:
- Ask you to pay the overpayment back directly to them – they will usually write to you about this
- Alter your tax code to recover the debt
- Ask a debt recovery agency to contact you on HMRC’s behalf
- Pass the debt over to the Department for Work and Pensions (DWP) or, in Northern Ireland, the Department for Communities (DfC):
- If you get universal credit, your universal credit will be reduced to recover the overpayment
- If you do not get universal credit, DWP (DfC) will try and recover the debt directly
If HMRC have transferred your debt to DWP/DfC you will need to speak to DWP/DfC directly if you have questions or issues about repayment of the debt. This is because the debt has been transferred to DWP/DfC. If you are challenging the amount of the overpayment, why it happened or whether you should have to pay it back at all, then as explained above you will need to contact HMRC.
You can click on the headings below to find out more about each method of recovery:
- Repaying HMRC directly
If the claim that caused the overpayment has ended and HMRC cannot collect the money back from ongoing payments of tax credits they will try and recover the debt directly from you.
When this happens, HMRC pass the collection to their Debt Management section.
If you want to make repayments over a longer period, HMRC should agree to this if the payments seem reasonable without requiring detailed income and expenditure information although they may want to confirm your income/expenditure. Arrangements that will take longer than ten years will require completion of a full income and expenditure form.
Some people will be paying back two overpayments, one via ongoing recovery and another via direct recovery. This often happens where there is an overpayment on an old claim, and a new overpayment on a current claim. HMRC have a policy which means that they should suspend any direct recovery action until the ongoing recovery ends.
If this applies, you should ask HMRC to suspend the direct recovery action.
You can make payments to repay the overpayment by several different methods including direct debit, online banking, at a bank, building society or post office or by post, all of which are set-out on GOV.UK. If sending a cheque by post, HMRC have confirmed that they do not issue acknowledgements or receipts so it is important that you check your bank statement to see that the payment has been processed.
If you receive a demand letter from HMRC, it is important that you speak to them about the debt and arrange a repayment plan that is affordable. You should not ignore any letters. If you are worried about speaking to HMRC, you may be able to get support from a welfare rights or debt charity.
If you are not able to offer any payment, for example because you are out of work and claiming benefits, you should ask HMRC to suspend recovery due to financial hardship. If you does not engage with HMRC they may pass the debt to DWP to recover via your employer, start County Court Proceedings or seize goods from your home (called distraint).
If you have arranged a payment plan and find yourself struggling to afford the repayments, you should contact HMRC and tell them you are experiencing hardship. HMRC may be able to reduce the amount of the payments or suspend recovery for a period of time.
Any hardship arrangement will only last until the end of the tax year and you will need to reapply again in the new tax year. There is more detail on the Revenuebenefits website.
- Repaying via a debt collection agency
HMRC also pass debts to private debt collection agencies in the early stages of recovery and you may receive a letter from one of the agencies. There is a list of current agencies used by HMRC on GOV.UK. They should deal with any payment plan requests in the same way as HMRC (explained above) and if you are in hardship the agency should pass the case back to HMRC to consider the hardship request.
If you do not contact the debt collection agency, the case will eventually (normally after 12 months) be passed back to HMRC who may start County Court Proceedings or seize goods from the claimant’s home (called distraint).
Use of a debt collection agency by HMRC will not affect your credit rating. The debt remains the responsibility of HMRC, it is not actually transferred to the agency or sold on to them.
- Repaying via a change to your tax code
HMRC are collecting fewer debts via tax code changes since the introduction of universal credit. HMRC will contact you to let you know if they are amending your tax code in order to recover overpaid tax credits. HMRC will usually write to you about adjusting your tax code and you may be able to discuss an alternative option of repayment.
- Repaying through universal credit
If you have started receiving universal credit, your tax credit debt will pass over to DWP (or DfC) and they will collect it from your universal credit payments. Even if you then stop claiming universal credit, once it has been transferred to DWP, they will be responsible for collecting the debt. They have similar powers to HMRC, but they can also use something called a ‘direct earnings attachment’ which means they can ask your employer to take money from your pay before it is paid to you.
When the debt is transferred, you should receive a letter from HMRC setting out all of your outstanding overpayments.
If the recovery of the tax credit overpayment from the universal credit payments is causing hardship, you will need to speak to DWP/DfC), not HMRC.
- Repaying DWP/DfC directly
HMRC may transfer a tax credit overpayment debt to DWP/DfC even if you are not claiming any benefits such as universal credit. This is because DWP and NI DfC have some different legal powers to HMRC which mean they have more options available to them to collect outstanding debts from individuals. One of the key differences is that DWP and NI DfC can collect outstanding debts directly from a person’s pay via their employer, using a direct earnings attachment, without the need to first take the person to court.
If HMRC transfer the debt in this way, they should write to you (TC1131 non-UC) to tell you. The letter will state the amount of the outstanding debt and explain what will happen next. Following the issue of the letter from HMRC, DWP or NI DfC will contact you about your debt and should give you at least 21 days to contact DWP (or NI DfC) to discuss repayment arrangements. After the 21-day period, DWP (or NI DfC) may decide to pursue recovery via a direct earnings attachment. If they do, they will write to you and your employer about starting the direct earnings attachment.
There is more detailed information about this on our website for advisers, Revenuebenefits.
If the recovery of the tax credit overpayment from pay is causing hardship, you will need to speak to DWP/DfC, not HMRC.
Debts from a joint tax credits claim
The law says that an overpayment debt for a couple can be collected by HMRC in full (but only once!) from either partner in a joint claim. The stated policy of HMRC where this has happened following a household breakdown is to write to both claimants (making every effort to trace any former partner for whom they do not have an up-to-date address). Each will be asked to pay 50% of the overpayment, although legally both parties to the claim remain liable for the whole debt.
If one partner believes that there should be a difference in what they each should repay, then HMRC will take into account both party’s circumstances and may ask each of to pay a different amount, or one of party to pay the full amount. Alternatively, both parties to the claim can agree between themselves to pay different amounts and inform HMRC of this decision.
Our understanding is that if debts from a previous joint claim are passed across to universal credit, they will be split 50/50. Either claimant should then only be responsible for one half of the joint debt from that point on. If you are in this situation and you think your debt should be split differently, you should speak to HMRC.
Tax credit debts from many years ago
In England and Wales, the Limitation Act 1980 provides that recovery action for debts should commence within six years from the debt becoming payable. Tax debts are not covered by this law, but tax credit overpayment debts are, in theory. In most cases, this prevents HMRC from taking County Court action but generally doesn’t stop recovery from ongoing benefit awards (for example from universal credit) or by other methods such as direct earnings attachments or adjustments to tax codes.
The law on whether this six-year rule applies is complex and if you think it might apply to you, you should seek legal and/or debt advice from a specialist.
The most important thing is that you do not ignore any letter you receive from HMRC, DWP or NI DfC and you should take steps to get advice or contact the relevant government department that has contacted you.