Tax Credit Debt – All You Need to Know with Tips & FAQs

tax credit debt

It’s possible for you to be contacted by the HM Revenue & Customs (HMRC) regarding a tax credit overpayment that you may have received. 

In this case, you will have to pay them back and there’s a chance it could mess up your finances by a lot. 

Today, I’ll be discussing how a tax credit overpayment occurs, what you can do to prevent it as well as what you can do to deal with it if it has already occurred. 

How Do Tax Credit Overpayments Occur? 

You are required to provide details of your household income to the HMRC when you apply for tax credits. HMRC then calculates how much your tax credit payments will be based on the amount of money they think you will earn in a year. 

Once the year ends, HMRC looks at the actual income you received that year. If this income is higher than what they had calculated, this means that you have been paid too much in tax credits.

As with all other types of income tax arrears, the consequences for refusing to pay a tax credit debt can be extremely serious.

If you’re struggling with your payments, I suggest you seek help from a professional. It can be a good idea to get information from an independent debt charity. 

If you have a particularly fluctuating income and you want to avoid overpayment of tax credits, then I highly recommend you inform HMRC immediately as soon as your income changes. 

How Can I Pay Off My Tax Credit Debt? 

There are mainly two ways through which you can pay off your tax credits overpayments. 

  • The first is to reduce your future tax credit payments until the overpayment is paid. 

If you are currently unemployed and getting the maximum amount of tax credits, your payments will usually be reduced by 10% until your overpayments are paid. 

If you’re employed and/or are not getting the maximum amount of tax credits, then your payments will usually be reduced by 25% until the debt is paid. 

If you’re employed and/or getting the minimum amount of tax credits, then your payments will stop entirely until your debts are repaid. 

  • The second way to to pay off tax credits overpayments is to pay HMRC monthly payments until your debt is paid. 
tax credit debt

How Do I Deal with Tax Credit Overpayments if I’ve Moved to Universal Credit? 

You will get a letter from HMRC after you have moved to Universal Credit which will tell you how much you owe.

This could be months after you have moved to Universal Credit.

If you’re already making payments towards a different ‘Notice to Pay’, it’s important that you keep making these payments.

Once you receive the letter from HMRC, the Department for Work and Pensions (DWP) will reduce your UC payments in order to make up for your debt. Your Universal Credit payments will remain reduced until your debt has been paid off completely.

If you’re having trouble dealing with this situation, you should opt to contact an independent debt charity for information on tax credit management. Some independent charities that you can opt to contact include Payplan and StepChange.

If you’re struggling to pay off tax credit debts, what your best option is depends highly on your financial situation as well as the amount of debt you owe.

A professional from a debt charity will sit with you, analyse your situation and provide you with information which will help you make an informed decision about how you can deal with your debts. 

What can HMRC Do If I Refuse to Pay My Tax Credit Debts? 

As I mentioned earlier, the consequences of not paying your tax credit debts can be quite severe. This is why just like Council Tax debt, you should definitely treat tax credit arrears as priority debts as well.

HMRC has the authority to take certain actions if you refuse to make payments towards your debt to them. 

They can: 

  • Pass your debt to a debt collection agency. You will then be contacted by them regarding your debt. These individuals do not have any extra-legal powers but they will constantly be trying to contact you to inquire about your debt. 
  • Take money directly from your benefits in order to pay off your debts. 
  • Take money directly from your wages in order to pay off your debts. They do this by increasing the amount of tax you pay.

    If you earn less than £30,000, HMRC can do this if you have debts less than £3,000.

    If you earn more than this, HMRC can collect larger debts from you using your tax code. 
  • Take you to court and get a County Court Judgment (CCJ) against you. 
  • Send bailiffs to your home. Bailiffs have the ability to seize your goods and sell them off in order to pay for your debts. Keep in mind that HMRC also does not need a court order to send bailiffs to your house. However, it’s very rare for them to use bailiffs. 

If HMRC is threatening to take money from your Universal Credit or Tax Credit Award and you cannot afford this, I suggest contacting them and explaining your situation.

You can opt to send a copy of your expenditures and income to them as proof to let them know you’re doing all you can to pay back the debt as quickly as you can. 

What is a Notice To Pay? 

A Notice to Pay is the letter you will receive from HMRC which will detail how much tax credits you’ve been overpaid and how much you owe to them.

It will have all the details you need in order to pay them back including HMRC’s account and your tax credit reference number. You will mention this number in order to identify your payment to them. 

How Long Will I Have to Pay Back Tax Credit Overpayments? 

Typically, you are required to pay back your debt to HMRC within 30 days of receiving the Notice to Pay.

If you cannot afford to do this, then you should contact HMRC and explain your situation to them.

Depending on your financial situation, they will set you up with a schedule. This can be one of three scenarios. These are as follows: 

  • They will allow you to pay them back over 12 months with monthly instalments towards the debt. You will typically not need to provide a budget or any other additional information in this case. 
  • As long as you can pay more than £10 every month, they will agree to a payment plan that could last up to 10 years. If the amount you can afford each month is less than £10, they may still agree to it if the total duration of the payment plan is less than 3 years. You will not need to provide a budget in this case either. 
  • For a payment plan whose duration lasts over 10 years, you will need to provide them with a budget and you will also have to pay more than £10 every month. If it’s going to take you an exceptionally long time to pay off your debt, then HMRC may consider writing it off.

If you cannot afford to pay £10 a month and your debt will take you more than 3 years to pay off, then HMRC will typically agree to wait 12 months to see if your financial situation gets better. 

If your financial situation is not better after 12 months, they may agree to write off the debt. 


Tax credit overpayments are definitely not to be taken lightly. If you happen to receive one, then it’s important to make it a priority and to make sure you pay it off within a reasonable time. 

Also, ensure that you’re cooperating and being communicative with HMRC so they don’t pursue any legal action against you.


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