The recent crackdown on tax credit overpayments is leading to some of Britain’s lowest-income families facing a sharp fall in their income, through no fault of their own. Deven Ghelani, Director and Founder of Policy in Practice and one of the architects of Universal Credit, spoke on LBC radio recently calling for older tax credit debt to be written off.

Given the amount of support needed to help people find their feet in the pandemic, the clawing back of tax credit overpayments is kicking people when they are down.

Deven Ghelani, Director and Founder of Policy in Practice

Listen to Deven speaking with Shelagh Fogarty, LBC Radio

Universal Credit is being used to paper over the failings of Tax Credits

The issue with tax credit overpayments goes back as far as 2003 when Working Tax Credit and Child Tax Credits were newly introduced. As the years have gone on, the problem has compounded.

Despite common misconceptions, tax credit overpayments are rarely to do with fraud and are most often caused by official error. In many cases, these families did not know they were being overpaid. The problem has gone unresolved for years and has been exacerbated by the pandemic.

Since the transition to Universal Credit, the job of collecting tax credit overpayments has passed from Her Majesty’s Revenue and Customs (HMRC) to the Department for Work and Pensions (DWP). The DWP, through Universal Credit, is much more effective at collecting overpayments, and since the number of people receiving Universal Credit has doubled to more than 6 million since the pandemic began, the issue with tax credit overpayments is affecting many more people than before.

An investigation by The Times found that:

“Since January, 47,000 Universal Credit claimants per week have had payments cut because of historic tax credit overpayments.

“Claimants also had £63 million deducted from their accounts for this reason between April and November last year.”

This means that families on the receiving end of the clawback are seeing significant cuts to their monthly income at a time when they are already financially struggling.

The impact of collecting tax credit overpayments on people

We published a blog post about one person’s journey through the welfare system and critiqued whether it has become easier for people to navigate.

The woman we featured, known as S, was paying £740 in rent. In 2017 her Housing Benefit fell to £625 per month due to a combination of higher earnings and overpayments, leaving her with a monthly shortfall with her rent of £115. However, S was only made aware of this when she received an arrears statement for £2,770 two years later.

S’ story speaks to the heart of the problem, namely that her overpayments have caused other issues. Not only is she now dealing with repaying her overpayments but she is also significantly in debt to her landlord.

The policy of deducting overpayments from Universal Credit will create or compound problems like this for people all over the country.

Policy in Practice’s recommendations for dealing with tax credit overpayments

Currently, HMRC is under no obligation to show evidence of these overpayments and  HMRC is authorised to go back further than other creditors, with statutory debts being limited to seven years.

As such, when people began to move onto Universal Credit in large numbers in 2015 and the scale of the tax credit overpayments issue became apparent, we recommended that the clawback be limited to overpayments in the last 2-3 years and only in cases where evidence would be produced.

We recommend that anything older than two years should be written off. Overpayments are not the claimant’s fault and are caused by the flawed design of tax credit. It’s a small sum in the context of other support for people impacted by the pandemic.

Alternatively, put the onus on HMRC to show the paper trail giving rise to the overpayment. We suggest that easy and routine access to the overpayment or individual assessment of repayments are allowed. At the moment, this is only carried out if the person can prove exceptional hardship, and proving this is very complex.

The pandemic means that many people on tax credits have lost their job and been forced to move onto Universal Credit. By continuing with the aggressive clawback of historic overpayments through Universal Credit the government is kicking people when they are down and undoing a lot of the good work done to support people during the pandemic.

Next steps

  1. Keep up to date with the story of S’s Universal Credit claim by subscribing to our monthly newsletter
  2. Read more about our work supporting councils in offering holistic support to people with multiple debts
  3. Join our next webinar, How housing providers can boost the income of tenants, on Wednesday 23 June. Details and register

Register for an upcoming webinar

TitleDateStart TimeDurationRegister
Budgeting support: Best practice ways to help low-income households Over one fifth of UK households have less than £100 in savings to cushion themselves against economic shocks. With Christmas gone, frontline organisations anticipate more money-related enquiries from people in need as they seek support with their household finances.

In our first webinar of 2022 we talk to advisors to hear what budgeting challenges households have, and what support they give to their customers.

Join this webinar to learn:
- Personal debt in the UK: the size and nature of the problem
- How organisations from different sectors help people to grow their financial strength
- What supporting role technology can play
26/1/202210:30 GMT1.5 hours
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