Government Clampdown On Tax Credit Overpayments

An investigation by The Independent newspaper and campaign group False Economy has revealed that the Government has called in debt collection agencies (DCAs) to try and recover around £1.6 billion in overpaid tax credits from 4.7 million British families. 215,444 overpayment cases were referred to DCAS in 2013/14 alone.

Tax credits overpayments

Child and working tax credits were introduced by the Labour government in 2003 to help low income families achieve a reasonable standard of living. And whilst overpayment has been a problem right from the start, a family’s income was originally allowed to increase by up to £25,000 before any overpaid tax credits had to be given back. However, under the Coalition Government, this threshold was gradually reduced to just £5,000.

As a result, some of Britain’s poorest families have been hit by overpayment bills from Her Majesty’s Revenue and Customs (HMRC) – plunging hundreds of thousands of households into debt. Many overpayments have been caused by Government error, whilst others stem from an unexpected rise in income during the financial year. Tax credits are based on estimated earnings, so people don’t realise they’ve been overpaid until the end of the year.

The situation is reflected in figures released by the Citizens Advice Bureau (CAB) on 30 May 2014, when the debt charity reported a 14% increase in the number of people contacting them for help with debt problems caused by tax credit overpayments. CAB responded to more than 29,000 tax credit-related enquiries in 2013/14. Of these, around half involved problems with budgeting for the overpayments requested by HMRC.

Commenting on their statistics, CAB Chief Executive, Gillian Guy, said: ‘For thousands of families, Whitehall calculations are leading to household debt. Tax credits are there to make sure people get a decent standard of income, but the sharp rise in debts from overpaid tax credits suggests this policy is having the opposite effect.’

A total of around £1.5 billion of tax credits was overpaid in 2012/13. The amount of an individual family’s overpayment obviously depends on their circumstances and any errors made in calculating their tax credits, but repayment requests can range from a few hundred pounds to several thousand. People who are already struggling to make ends meet on a low income simply can’t afford to pay the money back – so HMRC brings in the debt collectors.

The DCAs then try to recover the monies by bombarding the families with phone calls, text messages and letters demanding repayment. According to The Independent and False Economy’s investigation, around 80 households have actually had assets seized directly by the DCAs. HMRC insists that the DCAs they use ‘…adhere to (the) highest customer service standards in line with the Office of Fair Trading’s code of practice’. But despite this, many people have reported feeling harassed and frightened by the debt collectors.

And the situation as a whole is set to get worse next year. From 2015, HMRC will be granted new powers allowing them to take money for overpaid tax credits directly from people’s bank accounts, as long as at least £5,000 remains in the account afterwards. This change could affect around 17,000 people, with Gillian Guy warning that whilst ‘safeguards’ will be put in place, ‘…with such huge pressure on household budgets, it does not take much to push families into financial trouble and mistakes by HMRC will be harmful.’

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Andy Gorton is the author and editor of the Bankruptcy Clinic

Andy Gorton – who has written posts on Bankruptcy Clinic Blog.

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