Facing tax credit overpayment debt can be overwhelming and stressful. One unexpected notification from HMRC can quickly derail your financial stability, leaving you anxious about potential consequences. At MoneyPlus, we understand that these situations are rarely straightforward and can happen to anyone due to life changes, administrative errors, or misunderstandings.
In this guide, we walk you through everything you need to know about tax credit overpayments, from understanding what they are to exploring your options for repayment and looking at potential debt management solutions.
What is a tax credit overpayment?
A tax credit overpayment occurs when you’ve received more tax credits than you were entitled to during a specific tax year. This can happen for various reasons, including:
- Changes in your income that weren’t reported promptly
- Incorrect information provided when initially claiming tax credits
- Errors made by the tax authority during the assessment of your claim
- Significant life changes such as job loss, relationship status changes, or alterations in childcare arrangements.
When an overpayment is found, HMRC (His Majesty’s Revenue and Customs) will typically request that you repay the excess amount that was incorrectly paid to you. If you cannot afford to pay this amount back immediately, you can fall into tax credit debt.
Can you go to jail for a tax credit overpayment?
While HMRC do technically have the power to take you to court for refusing to repay a tax credit overpayment, it’s very unlikely you will be imprisoned. However, there are serious consequences for intentionally providing false information or deliberately avoiding repayment over a long period of time.
While prison is generally off the table, if you’re found to have deliberately misrepresented your circumstances to receive higher tax credits, you could face substantial financial penalties and criminal prosecution in extreme cases of fraud.
For most people, however, tax credit overpayments are genuine mistakes, and HMRC’s primary goal is to recover the incorrect payment, not to criminally prosecute.
How do I pay back tax credit overpayment?
If you’ve received a tax credit overpayment from HMRC and you are looking to pay it back, here’s what to do:
- Check the overpayment notice
HMRC will send a notice explaining the overpayment, the amount owed, and why it occurred. Review this carefully and contact HMRC if you believe there’s an error. - Repayment methods
If you accept the findings listed in the overpayment notice, you will have to make a repayment. Luckily, HMRC offers several options to repay the overpayment. These include:
- Deduction from future payments: If you’re still receiving tax credits, HMRC may simply reduce your future payments until the overpayment is repaid.
- Direct payment: If you’re no longer receiving tax credits, you can pay via bank transfer, online banking, or by debit/credit card through HMRC’s online services.
- By post: You can send a cheque made payable to “HM Revenue and Customs only” with your payment reference number included.
- Set up a payment plan
If you cannot repay the full amount at once, you can contact HMRC to arrange a manageable repayment plan. They may ask for details of your income and expenses. - Seek support if needed
If repayment causes financial hardship, contact HMRC or seek advice from organisations like Citizens Advice.
How long can HMRC chase a debt for tax credits?
Unlike most private debts, tax credit overpayments operate under exceptional legal rules. While the Limitation Act 1980 typically prevents most creditors from pursuing debts after six years, HMRC stands in a unique position with tax credit recoveries.
Can tax credit overpayments be written off?
Tax credit overpayment write-offs are complex and relatively rare, with HMRC maintaining strict criteria for debt relief. However, understanding these nuanced circumstances can help you better consider the potential options for managing your overpayment.
The most straightforward scenario for potential write-off involves minor overpayments under £500. In these instances, HMRC may consider debt relief based on the specific circumstances of the overpayment, your history of reporting accuracy, and a discretionary assessment of your case. However, this is not a guaranteed outcome and depends on a careful review of your individual situation.
Another potential avenue for debt mitigation occurs when the overpayment results entirely from an HMRC error. To qualify, you must have provided completely accurate information, played no role in creating the error, and demonstrated full transparency throughout the process. Even in these cases, a full write-off is not automatic and requires substantial evidence.
Exceptional hardship provisions represent the most challenging path to debt write-off. These are reserved for individuals experiencing extreme life circumstances, such as serious medical conditions, catastrophic financial loss, or prolonged unemployment. Pursuing this option requires extensive documentation and a comprehensive proof of your financial challenges.
What to do if you cannot afford your overpayment repayments
Beyond complete write-offs, HMRC may consider alternative debt mitigation strategies. The important thing to remember is, if you’re struggling with tax credit overpayment repayments, not to panic. Here are some proactive steps you can take:
- Contact HMRC immediately: Explain your financial situation and request a manageable repayment plan.
- Seek professional advice: Either get in touch with a debt advice service, such as MoneyPlus, to ask for advice, or speak with a tax specialist who can review your specific circumstances.
- Consider debt management options: Speak to a professional debt management solutions company, like MoneyPlus, about specific debt management options. This could include looking at entering into an Individual Voluntary Arrangements (IVAs) that includes all of your debt, including any tax credit debt, or maybe a less formal Debt Management Plan.
At MoneyPlus, we understand that financial challenges can be stressful. Our expert team can help you work through any tax credit overpayments debt you may have found yourself in and develop a personalised strategy to regain your financial stability. Get in touch with our friendly team today for more advice and information.
