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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 credits underpayments

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 means you may have been paid more, or less, tax credits that you were entitled to receive. Here we explain what to do if you have a tax credits underpayment.

A highlighted word in the dictionary. The word highlighted is 'UNDERPAY', the word underneath this one is 'UNDERPAYMENT'. Showing as white text on a black background.
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Usually the amount of tax credits you are actually entitled to for a tax year is not decided until the award ends and HMRC review your actual household income and circumstances for the period of the award (usually a tax year). HMRC will then make their final decision about entitlement for the tax year just ended. At that point, HMRC compare what they have paid to you with what you were entitled to and if they have paid more than the entitlement, you will have an overpayment. If they have paid less than the entitlement, you will have an underpayment.

How underpayments happen

Tax credits are worked out using yearly rates and yearly income figures and then paid in weekly or four-weekly instalments during the tax year (6 April in one year until 5 April the next year).

The amount you get during the tax year is an estimate of what you are likely to be entitled to. People’s circumstances and income can change and until the end of the tax year, HMRC cannot make a final decision about how much you are actually entitled to that year. This decision is usually made during the renewals process. You may end up being overpaid (getting more than you were entitled to) or underpaid (getting less than you were entitled to).

Where a person claims tax credits and then universal credit during the same tax year, or they are sent a migration notice and don’t make a universal credit claim by the deadline in the notice, their tax credit award will usually be finalised before the end of the tax year. See our moving to universal credit section for more information.

The effect of income changes

Underpayments often arise because of reduced income. The income figure used to work out the amount of tax credits you get is the annual household income figure for the tax year (from 6 April to the following 5 April). The initial decision about your award is based on income from the previous year and then later compared to income in the year of award (the current year), so if there is a difference over or under a certain amount, it will affect the amount of tax credits you are is entitled to in that year.

There is more information about which income figure will be used to calculate an award in our disregards section.

Income changes do not actually need to be reported until the end of the tax year but if you do keep HMRC up to date about any income changes, your tax credits may also be adjusted at the same time. So, if you think your income (and that of your partner) for this tax year is likely to be at least £2,500 less than your previous tax year’s income, it is possible you might be being underpaid. If you tell HMRC about this during the tax year the amount of tax credits you get for the rest of the year may go up.

How underpayments are paid

If you do not tell HMRC about your income going down until the end of the tax year, when your claim is being renewed, you should be paid any underpayment as a lump sum at that stage. If you are waiting for an appeal to be heard, HMRC might hold on to the underpaid money until the appeal has been decided.

If you are in in receipt of other benefits, we recommend getting advice about reporting income changes for tax credits.

Universal credit and in-year finalisation

If you claim universal credit, your tax credit award will end at the point your claim for universal credit is accepted. In most cases, this means that your tax credit award period will end before the end of the tax year (5 April) and HMRC will finalise your tax credit award ‘in-year’. If you are sent a migration notice, asking you to claim universal credit as part of the formal migration process, and do not make the claim by the deadline on the notice, your tax credits will be terminated. HMRC will finalise your tax credit award ‘in-year’ in this situation as well.

If in-year finalisation applies, HMRC will decide how much tax credit you were entitled to for the period of your award and this will be based on your household income and household circumstances up to the in-year finalisation date. Any underpayment will be paid to you after your award has been finalised, rather than at the end of the tax year. There is more information about this in our section on moving to universal credit.

If you start to claim universal credit and HMRC decide you have been underpaid tax credits when they in-year finalise your tax credits award, then any underpayment of tax credits which HMRC pay to you should be disregarded as capital for universal credit purposes for the first 12 months.

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