The Chancellor must lighten burdens on the low paid, says LITRG

Published on 18 November 2008

When people are in difficulty through job losses, reductions in hours and other stresses in the wake of the recession, tax and tax credit debt can be unwelcome extra burdens. Therefore, in the run-up to the pre-Budget Report, the Low Incomes Tax Reform Group (LITRG) calls on the Chancellor, the Government and HMRC to ease the load on those with low incomes.

LITRG would like to see action to reduce existing debt burdens, to correct anomalies and to ensure that overpaid taxes are immediately repaid by HMRC. Government should:

  • compensate fully the remaining losers from the removal of the starting rate of income tax;
  • accelerate repayments of tax overpaid by pensioners which are currently held in suspense by HMRC;
  • introduce a special tax regime for students so preventing them from overpaying tax;
  • re-align the NIC threshold with personal tax allowances;
  • suspend tax credit overpayments that are triggered by job losses or reductions in working hours;
  • adopt fairer processes when recovering tax credit overpayments which arise when relationships start or finish;
  • adopt a streamlined approach to dealing with tax credit overpayment disputes and appeals for the years 2003-2007;
  • apply a light touch when collecting tax debt, ensuring that HMRC’s customer service and support functions are properly resourced to help debtors who are struggling financially; and
  • co-ordinate their approach where the same debtor owes money to more than one department or authority.

As the recession takes hold, and pressures mount through rising unemployment and falling incomes, the Government must respond sympathetically in their approach to debt collection. We are particularly concerned about people for whom losing their job may itself trigger or exacerbate debt to the Government.

And as falling interest rates erode the incomes of low income savers, we call on HMRC to take the initiative in repaying overpaid tax to non-taxpayers, and on the Chancellor to compensate fully those who are still losing out from the removal of the 10% starting rate of income tax earlier in the year.

10% rate losers

Despite the Chancellor raising the personal allowance to £6,035 per annum, not everyone who lost out from the withdrawal of the 10% starting rate of income tax has yet been fully compensated. People on the lowest incomes who are neither tax credit claimants nor pensioners over 65 are still worse off than they were last tax year. They are among the most vulnerable victims of the coming recession. In addition to any other help the Chancellor has in mind for people on low incomes, he should ensure that this group is now fully compensated for that loss.

Repayments to pensioners

For some years pensioners have been overpaying tax for a variety of reasons. We have identified here two of the most common.

  1. Many thousands of low income pensioners who are not liable to pay income tax nonetheless have tax deducted from their bank deposit interest. This should be repaid and HMRC have the information to enable this to happen, but they are not currently matching the relevant data and making automatic repayments (as they did a few years ago).
  2. It is a challenge for HMRC to calculate PAYE accurately where a pensioner draws income from multiple sources, and it can take years to detect errors. Consequently, tax overpaid is often not reimbursed for several years (if at all). There are potentially hundreds of millions of pounds to be repaid to millions of taxpayers, most of whom are pensioners.

A new student regime

Students very often overpay tax, sometimes for a short period, sometimes permanently. LITRG has been asking for a better way to be devised and has suggested solutions, as it is costly for both the student and HMRC. Special PAYE arrangements would achieve that goal and help hard-pressed students.

Re-aligning the NIC threshold

When the Chancellor made the welcome announcement in May 2008 raising the basic personal allowance for tax, he did not at the same time raise the level at which earners begin to pay national insurance contributions. For several years up to then, the NIC and tax thresholds had been aligned, so that people in work began to pay NICs at the same point as they started to pay tax. We call on the Chancellor to restore that link between the NIC threshold and the basic personal allowance, which was of benefit to low earners and proved a useful simplification while it was in force.

Tax credits debt

The tax credit system has helped many out of poverty, yet it remains a potential trap for those who do not act swiftly to avoid being overpaid. We would not wish ignorance and fear of the system to propel vulnerable claimants into overpayment, and thence back into poverty. The changes of circumstances that tend to make people worse off are also those which can trigger the worst overpayments.

Overpayments following job loss or reduction in working hours

When a person who receives working tax credit loses their job, their tax credit entitlement comes to an end, subject to a four-week run-on. This can also happen if their hours are reduced. If like many claimants HMRC have up to now been recovering an overpayment by instalments from their ongoing award, the claimant must now find the money to repay it within 30 days, or make a time-to-pay arrangement with HMRC. Thus, at a time when people need help and support, the tax credits system instead imposes on them additional debt and anxiety.

The Chancellor should suspend collection of overpayments when people lose their jobs in such circumstances, until they are able to resume repayment.

Overpayments when relationships start or finish

If a person enters or leaves a relationship, their entitlement to tax credits ends, and they have to make a new claim as a single person – or, as the case may be, with their new partner as a couple. If they forget to make a new claim, or delay doing so, all the credit paid to them under their former entitlement is a recoverable overpayment, and cannot under present law be reduced by the credit which they would have received if they had made a new claim on time. Thus the Exchequer wins both ways: they collect the overpayment in full, and will not pay the credit to which the person was eligible, but which they didn’t claim. The claimant, on the other hand, is plunged into debt, maybe even poverty, because they failed to complete the right paperwork at the right time. Overpayments can run into thousands of pounds.

We call on the Chancellor to ease the situation for such people by allowing set-off of the credits that would have been payable had the new claim been made on time. This used to be HMRC’s practice until May 2007 – we call for it to be reinstated.

Adopting a streamlined approach to old overpayment disputes

HMRC are still dealing with disputed overpayments from as far back as the early years of tax credits, when the system was in chaos and overpayments of thousands of pounds were being generated by HMRC’s own mistakes. Yet HMRC adopted a strict approach to recovery – inappropriately so owing to the novelty of the system and the confusing nature of the official notices. Their inflexible attitude gave rise to huge numbers of disputes by claimants, some of which are still being fought.

HMRC should now take a pragmatic approach to those old disputes by writing off all outstanding overpayment debt in the first four years of tax credits which was either caused or exacerbated by official error.

Tax debt

Tax debt is a frequent trigger for insolvency or bankruptcy. Yet, as custodian of the tax credits system, Government’s chief instrument for lifting people out of poverty and getting them back to work, HMRC have a duty not to exacerbate poverty and joblessness in the manner in which they collect tax debt.

Giving HMRC the wherewithal to offer support to debtors

HMRC too are facing cutbacks. Therefore, it is for Government to ensure that HMRC has sufficient resources to offer appropriate front-line help and support to people facing financial hardship.

A joined-up approach to debt across Government

People on low incomes who are in debt to one Government department might also find themselves indebted to many – to HMRC for tax credit overpayments, to the Department for Work and Pensions for benefit overpayments, to the local authority for overpayments of housing benefit or council tax benefit, or for council tax arrears. A co-ordinated approach between all Government departments, aligned with the department that applies the lightest touch to debt collection, is essential to minimise both stress to the individual debtor and cost to the public purse.

About the Low Incomes Tax Reform Group (LITRG)

The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation (CIOT) to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.


Contact: Robin Williamson (Tel: 0844 579 6700, Fax: 0844 579 6701)