⚠️ We are currently updating our 2020/21 tax guidance across the website
What can I do if I have an overpayment?
Tax credits and benefits
Overpayments and underpayments are a normal part of the tax credits system. This is because when you receive a tax credits award it is not final until after the end of the tax year for which it has been given. Here we detail what to do if you have a tax credit overpayment.
⚠️ Universal credit (UC) is a new benefit which will eventually replace tax credits, and some other social security benefits. Universal credit is now available across the UK and most people are no longer able to make a brand new claim for tax credits and are expected to claim UC (or pension credit) instead. Existing tax credit claimants are expected to be moved across to universal credit between November 2020 and September 2024. This follows a pilot involving no more than 10,000 people who will be moved between July 2019 and July 2020, although this may change due to the impacts of the coronavirus outbreak in the UK. You can find out more about this in our universal credit section.
Introduction to 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 existing 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 the 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 (called the renewal process) can, but does not always, throw up underpayments or overpayments.
What are overpayments?
Overpayments occur when you receive more than you are entitled to for the year.
The law allows HM Revenue & Customs (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.
Similarly, HMRC may decide to treat any tax credit already paid to you as an overpayment, if they decide that you were not entitled to it.
So you can see that 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.
Universal credit and in-year finalisation
If you claim universal credit (UC), 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 in-year finalisation applies to you, HMRC will decide how much tax credit you were entitled to for the period of your award and this will be based on your income and household circumstances up to the in-year finalisation date. Any overpayment will be decided after your award has been finalised, rather than at the end of the tax year.
If you have any outstanding overpayments of tax credits when you start to claim UC, your tax credit overpayment will be passed over to DWP and it will be recovered from your UC. In cases where you have arrangements to repay the money already in place, you may need to agree new arrangements. If this applies to you, HMRC and DWP will write to you. However, any challenge against the overpayment (other than affordability to pay) should be made using the HMRC dispute and appeal processes.
Causes of overpayments
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 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 your 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 you 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 complete your renewal forms on time.
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.
Everybody has the right to appeal to an independent tribunal against HMRC's decision on how much tax credits you should receive, which includes an award that shows an overpayment. You will have to ask HMRC for a mandatory reconsideration 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 you can 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 new version of 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. The full list of responsibilities can be found in the new version of COP 26 on GOV.UK.
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 to HMRC either by post or online. Since 6 April 2013, there has been 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 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, 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.
Paying back an overpayment
There are two main ways of collecting the overpayment from you: either from your ongoing award or by coming to you for a direct payment.
In addition, HMRC can alter your tax code to reclaim overpaid tax credits and they have legal powers to take you to court, take action to take repayment of money you owe to them from your bank account, or take goods from you (called distraint).
Until recently, HMRC have only used the option of repayment via tax codes in a limited way but, from 2019 onwards, they are beginning to use that option in more cases. 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 if they will adjust your tax code and you may be able to discuss an alternative option of repayment.
If you are receiving universal credit, your tax credit debt will pass over to DWP and they will collect it from your UC. See our universal credit section for more information. Even if you stop claiming UC, 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. Due to the coronavirus outbreak, DWP are currently not collecting tax credit debts from UC awards. This is a temporary measure during the pandemic.
HMRC are also transferring some outstanding tax credit overpayment debts to DWP (and to the Department for Communities in Northern Ireland, NI DfC) for those Departments to collect where the person is no longer claiming tax credits and is not claiming UC. 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 an individual's pay, using a direct earnings attachment, without the need to first take the individual to court. HMRC will write to you before they transfer your outstanding tax credit debt because it may be unexpected if the debt is from some time ago. There is more detailed information about this on our website for advisers, Revenuebenefits but DWP have said that, during the coronavirus outbreak in the UK (from March 2020), they have temporarily halted recovery of debts for a period.
From an ongoing award
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 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 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 from your ongoing award.
Before October 2014, debts from old claims could not be recovered from new tax credit claims. From October 2014 onwards, 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, they can reduce or even stop your scheduled ongoing payments after your change of circumstances to prevent (or reduce) the overpayment.
By direct recovery
If the claim that caused the overpayment has ended and HMRC cannot collect the money back from your ongoing payments of tax credits and they will try and recover the debt directly from you.
When this happens, HMRC pass the collection to their Debt Management section. 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. They should deal with any payment plan requests in the same way as HMRC and if you are in hardship they should pass the case back to HMRC to consider your hardship request.
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 Debt Management to suspend the direct recovery action.
You can make payments to repay the overpayment by several different methods including direct debit, online banking, at your bank, building society or post office or by post, all of which are set-out on GOV.UK. If you send a cheque by post, HMRC have confirmed that they do not issue acknowledgements or receipts so you should check your bank statement to see that the payment has been processed.
The law says that an overpayment debt for a couple can be collected by HMRC in full (but only once!) from either you or your partner. The stated policy of HMRC where this has happened following a household breakdown is to write to both you and your former partner (making every effort to trace any former partner for whom they do not have an up-to-date address). You will be each asked to pay 50% of the overpayment, although legally you both remain liable for the whole debt.
If you believe that there should be a difference in what you and your former partner should pay, then HMRC will take into account both of your circumstances and may ask each of you to pay a different amount, or one of you to pay the full amount. Alternatively, you can agree between you to pay different amounts and inform HMRC of this decision.
If you receive a demand letter from HMRC, it is important that you speak to them about your debt and arrange a repayment plan that is affordable for you. If you are not able to offer any payment, for example because you are out of work and claiming benefits, you should ask them to suspend recovery due to financial hardship.
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 your home (called distraint).
If the amount that HMRC are recovering from your 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 in your Personal Tax Account or you can contact the tax credits helpline (0345 300 3900 textphone 0345 300 3909 or NGT text relay if you cannot hear or speak on the phone: dial 18001 then 0345 300 3900) and tell them you are suffering hardship. They should refer your 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, they may be able to reduce the percentage that you repay from your tax credits each month.
If you are paying back an overpayment directly or if HMRC have asked you to start making payments and you are struggling to meet your essential living costs then you should contact the debt collection agency or HMRC and tell them you are experiencing hardship. They may be able to reduce the amount of your 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.
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.
Until 18 January 2010, HMRC would recover the whole of any overpayment arising on the old claim, but give no credit for what the claimant would have received had they made a new claim at the right time.
From 18 January 2010, HMRC introduced a new 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, claimants should contact HMRC’s tax credit helpline to ask for their 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. In order to access notional offsetting HMRC say that you need 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).
Note that the notional entitlement set-off will not cover the one month by which you will be able to backdate your new claim. Normally HMRC will grant the one month backdating automatically, but if that does not happen, you will need to ask for it.
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.
The procedures outlined above are set out in HMRC's code of practice COP 26, which can be found on GOV.UK.
More detailed information about challenging overpayments can be found on Revenuebenefits – a website for advisers dealing with tax credits and other HMRC benefits.