⚠️ We are currently updating our 2020/21 tax guidance across the website
What can I do if I have an underpayment?
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.
⚠️ 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.
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 also claiming housing benefit to help with your rent, you might prefer to tell HMRC about the change at the end of the tax year. This is because any extra tax credits you get during the tax year could mean the amount of housing benefit you get goes down. This is because your local council take into account the weekly amount of tax credits you are actually paid during the tax year when working out how much housing benefit you get – not the amount HMRC say you should have got when they make a final decision on your claim. Any lump-sum tax credits underpayment you get after the end of the tax year will be ignored for your housing benefit claim for 52 weeks. Similar rules might apply to your council’s local council tax support scheme. These interactions are complicated and depend on individual circumstances so before reporting a change to HMRC you should get advice on how it may affect other benefits.
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.
The page gives a brief overview of tax credit underpayments. For more information, visit the following pages and our website for advisers: