How to pay Tax Credit Overpayment

Tax credit overpayments can happen for several reasons, and if you've received more than you're entitled to, you'll be required to repay the overpaid amount to HM Revenue and Customs (HMRC). Understanding how to handle this situation can be confusing, but knowing the steps to repay the overpayment will help you manage the process smoothly. This article will provide a detailed guide on how to pay a tax credit overpayment, outlining repayment options, the consequences of not paying, and what to do if you struggle to make payments.

What Is a Tax Credit Overpayment?

A tax credit overpayment occurs when HMRC pays you more than you were entitled to. This can happen due to:

• Changes in your circumstances that were not reported, such as changes in income, relationship status, or employment.

• Errors in calculating entitlement, either by HMRC or the claimant.

• Mistakes in reporting information, such as underestimating income or not providing the correct details during your tax credit application or renewal.

Regardless of the reason, HMRC will require you to repay the overpayment. If you're unsure whether you have been overpaid, HMRC will send you an award notice that details the overpayment amount and what needs to be done next.

How to Pay Back a Tax Credit Overpayment

HMRC provides several ways to repay a tax credit overpayment. The payment method will depend on whether you are still receiving tax credits or not.

1. If You Are Still Receiving Tax Credits

If you are still receiving tax credits, HMRC will reduce your future payments to recover the overpaid amount. This is the most common method of repayment and is usually the easiest. The amount they will reduce your payments by depends on your household income and the amount of tax credits you receive.

Here's how much HMRC may reduce your payments by:

• 10% if your household income is under £20,000 and you are receiving the maximum amount of tax credits.

• 25% if your household income is under £20,000 but you are not receiving the maximum amount of tax credits.

• 50% if your household income is over £20,000.

If you only receive the family element of Child Tax Credit, your payments may be reduced by 100%.

2. If You Are No Longer Receiving Tax Credits

If you are no longer receiving tax credits, you will need to repay the overpayment directly to HMRC. You can repay in a lump sum or through an instalment plan if you are unable to pay the full amount upfront.

You will receive a ‘notice to pay’ letter from HMRC, outlining the amount owed and how to make a payment. The payment methods include:

• Online or telephone banking: You can make a payment directly to HMRC using the bank details provided in your notice to pay. Ensure you use your 16-digit payment reference number, which can be found on your notice to pay.

• Direct Debit: You can set up a Direct Debit through HMRC to make regular payments towards the overpayment.

• Debit or credit card: Payments can be made online through the HMRC website using a debit or credit card.

• Cheque by post: You can also send a cheque to HMRC. Make sure to write your 16-digit payment reference number on the back of the cheque.

• At your bank or building society: You can make a payment in person at your bank or building society, but ensure you bring your notice to pay letter with the payment reference number.

3. Repayment through Other Benefits

If you are receiving other benefits, such as Universal Credit, HMRC may arrange to recover the tax credit overpayment from those benefits. A set amount will be deducted from your benefit payments until the overpayment is repaid.

What Happens If You Cannot Afford to Repay the Overpayment?

If you're struggling to repay the overpayment, it’s important not to ignore the situation. HMRC offers flexible repayment plans for those facing financial difficulties. Here’s what to do if you’re unable to repay the full amount:

1. Contact HMRC

As soon as you realise you’re having trouble repaying the overpayment, contact HMRC on their Tax Credit Payment Helpline: 0345 302 1429. They will ask for details about your financial situation, including your income and expenses, to work out a repayment plan that is affordable for you.

2. Negotiate a Repayment Plan

HMRC may allow you to repay the overpayment in smaller instalments over a longer period. They will review your financial situation and, in some cases, may offer reduced payments if you're facing financial hardship. Be honest about your circumstances, and provide HMRC with a clear budget showing your income and outgoings.

3. Breathing Space for Debt

If you need time to get debt advice or find a solution, you may be eligible for the Breathing Space scheme, which stops HMRC from taking enforcement action for 60 days. During this time, interest and fees on the overpayment will also be frozen, giving you some relief while you figure out a repayment plan.

What Happens If You Do Not Pay the Overpayment?

Failure to repay a tax credit overpayment can result in serious consequences. HMRC may take the following actions if you do not make payments or fail to negotiate a repayment plan:

• Debt collection agencies: HMRC may pass your debt to a debt collection agency. These agencies do not have bailiff powers, but they will contact you to arrange repayment.

• Legal action: HMRC may take legal action to recover the debt, including applying for a County Court Judgment (CCJ). This can affect your credit rating and your ability to borrow in the future.

• Direct recovery from wages or bank accounts: HMRC has the power to recover the overpayment directly from your wages or bank account without a court order.

It is always best to contact HMRC and arrange a payment plan rather than ignore the issue.

Can HMRC Write Off Tax Credit Overpayments?

In rare cases, HMRC may write off a tax credit overpayment, but this is generally only if the repayment would cause severe financial hardship, or if HMRC agrees that the overpayment was caused by their mistake.

You can ask HMRC to dispute the overpayment if you believe it was due to an error on their part, or you can apply for Exceptional Hardship. This process involves showing evidence of your financial situation and explaining why repaying the overpayment would cause significant distress.

Accessing Your Overpayment Details

To access details of your tax credit overpayments or check how much you owe, you can sign in to your Personal Tax Account online at GOV.UK. This will show you up-to-date information on your overpayments and any outstanding amounts. You can also use this account to manage your repayments.

Tips for Avoiding Future Overpayments

To avoid tax credit overpayments in the future, it’s important to ensure that HMRC has accurate and up-to-date information about your financial and personal circumstances. Here are some steps you can take:

1. Report changes promptly: If there are any changes in your income, employment, relationship status, or childcare costs, inform HMRC as soon as possible.

2. Check your award notice: When you receive your tax credit award notice, review it carefully to ensure all the information is correct. Report any discrepancies immediately.

3. Renew your tax credits on time: Every year, HMRC requires you to renew your tax credits. Ensure this is done before the deadline to avoid overpayments.

4. Keep records: Maintain accurate records of your income, expenses, and any changes in your circumstances to ensure you have the correct information when reporting to HMRC.

Conclusion

Dealing with a tax credit overpayment can be stressful, but understanding the repayment process and options available to you will help alleviate some of the pressure. Whether you are still receiving tax credits or have stopped claiming, HMRC offers several ways to repay overpayments, including instalment plans for those struggling financially.

It is crucial to stay in contact with HMRC, review your award notice carefully, and report any changes in your circumstances promptly to avoid overpayments in the future. If you find yourself in financial hardship, reach out to HMRC to discuss flexible repayment options, and seek advice from a debt adviser if necessary.

By staying proactive and managing your overpayments responsibly, you can ensure that the situation is handled efficiently and avoid further complications.