If you receive tax credit and your circumstances change but you don’t tell HM Revenue and Customs in time, you could end up with an overpayment, and subsequently, an old tax credit debt. 

HMRC won’t let you off with tax credits overpayments, so it’s important that you act quickly. And if you have already been asked to pay an overpayment back, there are ways to repay the money in an affordable way – or appeal against their claim.

Read on as we uncover the details about HMRC’s debt recovery. And claimants can use a registered charity for ongoing support by calling them direct. 

What are tax credits?

Tax credits are a government payment to help people out if they work and do not earn over a certain threshold, and/or if they have children. Thus, they are split into working tax credits and child tax credits. You can make a single claim or claim as a couple. If you apply with a partner, your combined income and circumstances will be means tested. 

There are certain criteria that you must meet to be eligible for payments. You may be able to apply for Universal Credit from the DWP if you are not eligible. 

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What are tax credit overpayments?

Overpaid Tax Credits are when the government pays you more than you are eligible to receive. 

Overpayment usually occurs because:

  1. HMRC estimated your future household income incorrectly
  2. You claimed with a former partner
  3. You did not inform HMRC of changes to your circumstances during the tax year
  4. Someone made a mistake processing your claim

Most calculations are made at the end of the tax year. 

What can I do if I have a tax credit overpayment?

If you think you have received an overpayment, it is important to ask HMRC’s tax credit office to investigate your income early. If you have an overpayment and don’t act, HMRC may start asking you to repay and begin a debt recovery process. You can contact HMRC on 0345 300 3900. Don’t wait until the end of the year to notify them of changes. 

Do I have to pay back Tax Credit debts?

Every claimant will need to repay any overpayment to HMRC and it is highly unlikely they will get away without paying, even over a longer period. There are many ways to repay a small or large overpayment, which make it affordable for your household. 

If you had an old joint claim with a partner and have been informed of overpayments, each claimant will be asked to repay 50% of the overpayment. 

How will HMRC Recover debts?

HMRC will write a letter to inform you they calculate that overpayments have been made and you need to repay your total tax credit claim overpayment. HMRC will recover payments in different ways, depending on the claimant’s current situation. For example:

“I still receive tax credits”

HMRC will take payments from your future tax credit payments, meaning you will repay the debt over the course of many months. Your income and household circumstances will decide if HMRC will recover 10%, 25% or 50% of your future payments. But if you claim the child payment, a 100% deduction could be applied. 

“I now receive Universal Credit”

The debt will be recovered from your ongoing Universal Credit.

“I don’t receive any tax credit award or DWP benefits.”

HMRC will send the claimant a notice to repay the overpayment debt; they will have 30 days to pay. This is known as direct recovery because you pay the money back yourself. If paying back the debt is difficult, you might be able to agree on a way to repay in instalments. You can ask HMRC for more time to pay when they use direct recovery.

You could use the services of a debt management company to help. Or use free equivalent services from some of the excellent charities throughout the UK. 

Work out a budget before agreeing!

If you are asked to repay directly, you have the option to use bank transfers, cheques, or agree to a direct debit. If the debt is too big and you want to agree on a repayment plan to spread out the cost, you should make a budget first.

A monthly budget will help you discover what you can realistically afford to repay without causing financial hardship and the possibility of other arrears accumulating elsewhere. You should do this before picking up the phone to speak with HMRC, so you already know what type of instalments you can and cannot agree to. Working out a budget may also work to your advantage as HMRC will see that you have already considered your finances and show you are doing your best to repay. 

What happens if I don’t pay HMRC debt?

If HMRC cannot recover the overpayment and you refuse direct recovery, they can take enforcement action, which usually means employing bailiffs to go to claimants’ homes. If you are dealing with bailiffs, you could benefit from our dealing with bailiffs letter template!

Alternatively, in England and Wales, cases HMRC are chasing will be passed to the DWP. In Northern Ireland, they can be passed to the DfC. They will use enforcement action by reducing your DWP or DfC benefits, using bailiffs, or take money from your employment income by changing your tax code. 

HMRC Tax Credit debt dispute process

If a claimant receives a letter from HMRC saying they owe back overpayments, the claimant can dispute HMRC’s claim. You can appeal against the overpayment within three months of receiving the letter, either online or in writing. The process can be tricky, but a charity will provide assistance for free. 

After you have sent your dispute, you will get a decision with the reasoning for the decision. You’ll also be asked to repay an amount relating to the decision. You may dispute this decision again. But you will need to send evidence or information to show why you do not agree with the decision. 

HMRC states that disputes are only successful less than 10% of the time when admin errors are made. 

How long can HMRC pursue a debt?

Some HMRC debts do not become Statute Barred, meaning a claimant can be chased for decades. The standard timeframe for HMRC to investigate claimants is four years. But there is nothing stopping them from pursuing much older debts. 

Can tax credits be Statute Barred?

Technically, credit overpayment can become Statute Barred, meaning they cannot start court action after six years. This is due to the Limitations Act 1980, which prevents older recovery cases from going to court to protect the legal system from becoming overwhelmed. 

But these debts are more complicated and there may be other ways for your debts to be recovered by HMRC. It’s unlikely you will avoid enforcement action before the time limit. National Debtline is renowned to be good at helping in these cases. 

Further support is available!

Claimants can find further support and assistance with charities, or they can find help by speaking with some respected debt management companies. Be careful when choosing the services of one of these providers because not all of them have good reviews and some can charge hefty fees. You may be better off using a free charity service. 

And we are always here to answer the most common questions from HMRC claimants. See our latest posts and guides for more information. Or share this page with someone you know is dealing with this type of HMRC debt!

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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