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Tax Credit Overpayments Debt Help & Advice

Tax credits fall into two categories, working tax credit and child tax credit. An overpayment of tax credit occurs when you have received more than credits in the tax year than you are entitled to. The tax year runs from 6th April to 5th April the following year.

At the end of the tax year, HMRC will check the amount they have paid you and if you have been paid more than you should have this is what is known as a tax credit overpayment.  Tax overpayments can date back years so even if you no longer claim tax credits you can still receive a letter.

When applying for tax credits, you will be asked to provide details of your household income. From the information you provide, HMRC work out the amount they expect you to earn that year and calculate your tax credit payments based on that information.

After your first claim HMRC will send you an award notice which is typically 4-8 pages long. It includes your personal information, amount of your tax credits and if you have any overpayments – these will be shown in Part 3 “amount due from you”.

Once the tax year ends, HMRC will review the income you actually earned over the tax year and if they think you have been paid too much in tax credits you will be asked to repay this.  It is important you repay what you owe, as like income tax, tax credits are considered ‘priority debts’ meaning the consequences of not paying them can be serious and can include:

  • Bailiffs
  • Court action
  • And in very extreme cases – imprisonment.

Therefore, it is important to inform HMRC right away if the circumstances around your income change in any way so they can adjust your tax credit payment to avoid any overpayments. You can inform HMRC of any changes on 0345 300 3900.

How to know you have been overpaid

If HMRC think you have been overpaid, they will say in your tax credit award notice. In some cases, you will receive a letter from HMRC telling you that you have been overpaid and how much by. It may also ask you to pay it back straight away, however there are other ways the debt can be collected which will be covered further down the page. You may not receive a letter but notice your tax credit payments going down.

Reason for overpayments

There are various reasons why overpayments in tax credits may occur. If your income or circumstances haven’t changed you may be confused as to why you have any overpayment. If this is the case you should look back at your renewal forms and ensure all the details are correct, in particular:

  • Your income for last year and this year
  • Your relationship status – if you are in a couple then BOTH sets on details should be included on the form
  • How many children you have
  • The number of hours you have worked
  • Your national insurance number(s)
  • Whether you are claiming any other kind of benefit i.e. – jobseekers allowance, pension, income support, disability allowance
  • Childcare costs
  • The payments you list match what you were actually paid

If these details are correct there are other reasons you may have received overpayments:

Your income has increased

You may have been paid too much by HMRC if they think your income is lower than it is, if your income doesn’t increase by more than £2,500 your award won’t be affected, however you should still inform HMRC to ensure they keep paying you the right amount to avoid any overpayments in the future.

If you think your income will be lower this year compared to last, you can contact HMRC and ask them to adjust your tax credits based on your new estimated income. Usually this means your tax credits will up, again this will only change if the decrease in income is more than £2,500.

HMRC haven’t changed your circumstances on your award

If you inform HMRC of a change in your circumstances and they fail to change your award right away – you may carry on receiving too much money leading to an overpayment once the change is made.

HMRC have a 30-day period to make any changes you inform them about, if they fail to make any changes within this period you shouldn’t have to repay any overpayment which builds up after the 30 days- as long as they haven’t sent you a new award notice and you failed to tell them about any mistakes.

The details on your award notice are incorrect

 If any details on your award notice are incorrect, you may have been paid too much in tax credits by HMRC.  Therefore, it is vital you check all the details on your award notice each year and ensure the details are correct. If any details change you need to inform them right away to avoid any overpayments.

If you think HMRC have made a mistake or hold any incorrect information you weren’t aware of, you can apply for an appeal or dispute the decision. If you miss the time limit for an appeal you can ask them to look at it as an ‘official error’.

You need to show these 3 things for a mistake to count as an official error:

  1. The mistake was mostly HMRC’s fault
  2. Changing the award would be in your favour
  3. HMRC made the mistake that led to the incorrect award

We will cover the process for lodging appeals, official errors and disputes later on.

HMRC claim you didn’t send back forms back in time

HRMC will send you out a renewal from after April of each year. This form is your claim for this year and will ask you to check your details are correct and to fill in your income for the year that has just ended. If you fail to complete and send the from back by the stated date it could lead to your current payments being stopped. Any payments you have received from April will be treated as overpayments if you fail to send the form back in time – even if you are entitled to them.

If your award does end because you didn’t renew your claim in time, you will receive a letter called a ‘statement of account’. HMRC should be able to cancel the overpayment and renew your claim over the phone as long as you contact them within 30 days of receiving this letter.

If you wait until after 30 days to contact them, your tax credits will only be paid again if you have a good reason for not renewing i.e. you or your partner were seriously ill.

Your relationship status changes

If you split from your partner permanently or become part of a couple you need to let HMRC know as soon as possible. If you don’t, any tax credits you receive after the date your circumstances change will be classed as an overpayment.

You should contact HMRC if you aren’t sure about whether or not you and your partner are a couple for tax credit purposes, they will be able to advise you. Make sure you keep a record of your conversation.

How do HMRC recover overpayments

HMRC may recover overpayments in different ways depending on if you still receive tax credits or not. The most common ways include:

Asking for the money back right away

If you no longer claim tax credits, HMRC will want to recover the money right away and will send you a ‘notice to pay’ letter. This letter will inform you that you were paid too much and will also let you know how much you must pay back. This usually needs to be paid back within 42 days of receiving the letter. If you can’t afford to do this within the time limit you should contact HMRC right away on 0345 302 1429.

Deducting the balance from tax credits, benefits or tax

  • HMRC may choose to reduce your tax credits until the overpayment has been cleared. If your household income is £20,000 or less and you receive the maximum amount of tax credits, they will be reduced by 10%. If your household income is more than £20,000 the reduction from your tax credits will be 50% until the overpayment is cleared.
  • If you receive any other benefits, you can agree in writing for deductions to be taken from them.
  • HMRC may reduce your PAYE tax code to increase the amount of tax you pay. If you earn less than £30,000 they can do this for debts up to £3,000. They can collect up to a maximum of £17,000 through this method depending on how much you earn.
  • In some cases if you choose to ignore any letters or contact from HMRC, enforcement methods may be used such as court action or bailiffs sent to your home. These measures are unlikely if you contact HMRC and come to a repayment agreement.

What to do if you don’t agree with the overpayment

If you are unsure whether or not to appeal or dispute a decision you’re not alone. If you think the decision is wrong then you should appeal within 30-days by asking HMRC to look at the decision again, you can contact HMRC on 0345 300 3900.  If they don’t change the decision, and you still don’t think it’s right then you can ask for it to be looked at by an independent panel by sending a form to HM Courts & Tribunals service.

Your request should include:

  • The date
  • Your name
  • Your date of birth
  • Your national insurance number
  • And what you think is wrong about the decision

HMRC must stop asking you for the money back as soon as they receive your appeal letter, until they have made their decision.  If you receive a letter from Debt Management – another part of HMRC- or a debt collection agency, you should send them a letter and a copy of your request letter to inform them your case is under appeal.

If you agree with the overpayment but don’t feel you should have to pay it back (maybe they didn’t change your award when you informed them your situation had changed or it was caused by an error on their part), you can dispute the decision and ask HMRC to review it. You can also return a completed tax credit overpayment form (TC846) within 3 months. While HMRC are reviewing your dispute, they can continue to reclaim the overpayments.

If you are out with the time-period to lodge an appeal or dispute and you feel the overpayment was HMRC mistake, you can send a letter stating why you think the mistake is an ‘official error’ and ask them to stop recovering the payments until they have reviewed the decision.

In some cases where paying back tax credits will cause financial hardship, HMRC may consider letting you reduce the rate at which you pay it back. In cases where there is evidence of mental-health problems or extreme financial hardship, they might consider writing part or all the debt off.

What to do if you can’t afford your repayments

If you can’t afford to repay the full amount within 42-days and you no longer receive any tax credits or benefits, you can request to pay the amount back over a longer period.

If HMRC accept your request to pay back the amount over a longer time period, you should work out what you can afford to pay each month. They will usually ask for details of your income and expenditure to work out what they will accept, ensure you include everything from rent to credit card repayments.

The follow time options for repayment are:

  1. 12 months – HMRC will usually accept an offer to repay the debt over 12 monthly instalments.
  2. 12 months to 10 years – You can usually request to repay the amount for up to 10 years, however HMRC won’t automatically accept any offer and will want to confirm your income and expenditure. Usually a direct debit of over £10 a month will be set up. If you can’t afford £10 a month then they may suspend the recovery of overpayments for 12 months. If after the 12 months you still can’t afford £10 a month HMRC may write off the debt on the ground of financial hardship.
  3. 10 years or more – This is usually requested if you have a low income and your overpayment debt is large. You will be asked to provide a full income/expenditure breakdown, again usually payments of under £10 a month won’t be accepted and HMRC should suspend the debt and review in 12 months.

If the overpayment deduction from your tax credits is putting you into financial hardship and you don’t have enough money to live, you can request HMRC to reduce the amount they are taking from your tax credits. You will need to complete and send back a form.

If HMRC plans to deduct the amount from your benefits and this will leave you with no disposable income, you can request that they suspend recovery of the overpayment. They will only do this if they believe your income will not increase in the future, this is usually very unlikely and HMRC will ask you to repay the amount if/when your circumstances change.

Remember, you should contact HMRC as soon as possible if you are struggling to make any repayments. You should not ignore any letters or communication from them as this may lead to more serious action such as bailiffs coming to your home or court action. If you do receive any letters threatening such action, you should get advice as soon as possible