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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. Instead, people are expected to claim UC or pension credit if appropriate. Existing tax credit claimants can continue to renew their tax credits and/or add extra elements to their claim. See our tax credit page for more information. Our understanding is that the majority of existing tax credit claimants will move to either universal credit or pension credit. It is expected that the majority of people who have not reached state pension age, and who continue to claim tax credits, will be invited to move to UC by the end of 2024. You can find out more about this in our universal credit section. 

What can I do if I have an underpayment?

Updated on 12 April 2023

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 credits underpayment.

Illustration of a computer displaying an error sign and a pile of coins

How do 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, HM Revenue & Customs (HMRC) cannot make a final decision about how much you were actually entitled to that year. This decision is made during the renewal 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, their tax credit award will usually be finalised before the end of the tax year. See our universal credit and stopping tax credits section for more information.

Does my income make a difference?

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

You can find out which income figure will be used to calculate your 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 any 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 you get for the rest of the year may go up.

How will I get my underpayment 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 receipt of other benefits, you get 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 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 underpayment will be paid to you after your award has been finalised, rather than at the end of the tax year. You can read more about this in our section on universal credit and stopping tax credits.

If you start to claim UC 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 UC purposes for the first 12 months.

More information

The page gives a brief overview of tax credit underpayments. For more information, visit the following pages and our website for advisers:

Tax guides

Introduction to the tax system How do I work out my tax? What income is taxable? What tax allowances am I entitled to? What tax rates apply to me? How is my tax collected? What if I cannot pay my tax bill? Do I need to complete a tax return? Self Assessment: understanding the basics What is Simple Assessment? How do I claim tax back? How do I claim back tax I have overpaid through PAYE on wages or pensions? How do I claim back tax if I complete a tax return? How do I claim back tax if I am taxed under the Construction Industry Scheme (CIS)? How do I claim back tax on savings income? How do I claim a marriage allowance refund? How do I claim back tax on a payment protection insurance (PPI) pay-out? Should I use a tax refund company? What is National Insurance? How do I get a National Insurance number? What are Specified Adult Childcare credits? What is Scottish income tax? What is devolution? Do I have to pay Scottish income tax? How does Scottish income tax work? What is Welsh income tax? Do I have to pay Welsh income tax? Do I have to join a pension scheme? Tax relief on your pension contributions HMRC digital services Enquiries, penalties, appeals, complaints and debt Enquiries How to survive an enquiry by HMRC Tax penalties Tax appeals Alternative Dispute Resolution How do I complain to HMRC? What if I cannot pay my tax bill? What if I have a tax credits overpayment?
Am I employed, self-employed, both or neither? Working through a limited company What is the national minimum wage? How do I work out my tax? What income is taxable? What tax allowances am I entitled to? What tax rates apply to me? How is my tax collected? How is tax collected on taxable state benefits? How do I check my coding notice? Do I need to complete a tax return? What tax do I pay on redundancy payments?Employment benefits and expenses What are benefits-in-kind? What payments and benefits are non taxable? What if I incur expenses in relation to my job? What travel expenses can I claim? What if I use my own car for business purposes? Payroll giving Allowances and expenses paid to armed forces personnel and deductions from their income Pensions and employees What is automatic enrolment for employees? What National Insurance do I pay as an employee? How do I repay my student loan? What if I do not pay enough tax? What if I pay too much tax? What if I work abroad temporarily? What if I am in the armed forces and work overseas? First time workers Apprenticeships

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