Recovery of overpaid tax credits

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Recovery of overpaid tax credits
  • Restriction of future awards
  • Direct repayment of overpaid tax credits
  • Direct earnings attachment
  • In-year overpaid tax credits

Tax credit awards are made provisionally and paid to claimants. The award is only final when the renewal is completed after the end of the tax year. The payments received by claimants are always based on the previous tax year’s income and, because of this, when the actual income for the previous year is calculated, it can produce underpayments or overpayments in respect of the year just ended.

When the award is finalised for a year, the actual income is compared with the prior year’s income and an adjustment is made to the award. In order to minimise the impact fluctuations of income have on claimants, certain increases and decreases in income are ignored. This is known as the ‘income disregard’. For more information, see the Finalising the tax credit award guidance note.

Where tax credits have been overpaid in respect of prior years, the overpayment is recovered in one of three ways:

  • restriction of future awards of tax credits
  • direct repayment where the claimant is no longer entitled to tax credits, or
  • instructing the claimant’s employer to recover the debt through the payroll (known as the ‘direct earnings attachment’) where the claimant is no longer entitled to tax credits and has not engaged with HMRC to repay the debt

Although in theory, HMRC can also collect up to £17,000 of tax debt via the PAYE tax code, in fact HMRC stopped using this method to recover overpaid tax credits with effect from 6 April 2016. This was done in order to prepare for the transition of tax credit debt from HMRC to the Department for Work and Pensions (DWP) with the introduction of universal credit.

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