Guidance

Tax credits debt in Universal Credit

Published 18 April 2016

1. About this guide

This guide is aimed at advisers who work with claimants who may move from tax credits to Universal Credit. It gives an overview of how tax credit debt is affected by the move to Universal Credit and what claimants may need to do.

2. Background to Universal Credit

Read an overview of Universal Credit.

3. How tax credits overpayments are affected

From 6 April 2016, DWP can recover overpaid tax credits from claimants who have moved to Universal Credit. This means tax credit debt will be recovered from Universal Credit instead of tax credit payments.

4. How tax credits overpayments are currently paid back

The main reason claimants are overpaid tax credit is because of changes in their circumstances, a mistake on the claim form or they didn’t renew their tax credit claim on time.

Currently, claimants who have been paid too much tax credit are asked to pay back any overpayments to HMRC.

Claimants can pay back any overpaid tax credit either by:

• having their future tax credit payments reduced, or
• if they don’t receive tax credit any more they will be asked to pay back the money directly – this is known as ‘direct recovery’.

If a claimant cannot afford to repay any tax credit debt in full, due to their financial circumstances, a ‘time to pay’ arrangement may be agreed with HMRC to spread their repayments.

Read more information about tax credit overpayments.

5. Moving tax credits debt to Universal Credit

From 6 April 2016, DWP will recover overpaid tax credit from claimants who have moved to Universal Credit. When a tax credit claimant makes a new claim for Universal Credit, for example, when they lose their job, their tax credits award is stopped.

HMRC will continue to make tax credit payments until they receive a stop notice from DWP, which is automatically sent when a claim for Universal Credit is made.

The move to Universal Credit could create a tax credit overpayment which the claimant will have to pay back as well as any other tax credit overpayments they may have.

If a claimant has moved to Universal Credit, HMRC will write to them with a letter called ‘Your tax credits overpayments’ (TC1131).

This will tell them that their tax credit debt will be transferred and recovered by DWP from their Universal Credit award. Different debts may be transferred at different times and therefore claimants may receive more than one letter.

Important
Claimants do not need to do anything when they receive this letter, unless they pay HMRC by standing order.

Claimants who pay HMRC by standing order will need to stop any existing standing orders with their bank. Claimants will need to check their bank statements to see if they are currently paying by standing order.

If the claimant has an agreement in place to pay back HMRC tax credit debt by direct debit (known as a ‘time to pay agreement’) this will automatically be stopped. This applies whether the agreement is with HMRC or an independent debt collector.

6. Joint claims and tax credits debt

If a joint tax credit award ends due to one or both partners moving to Universal Credit, HMRC will work out if they have been overpaid.

Each person will be notified separately of their own individual tax credit debt which will usually be half of the outstanding amount of overpayment.

Those claimants who do not move to Universal Credit will be notified separately of their share of tax credits debt by a letter called a Notice to Pay (TC610).

7. Paying back tax credits debt through Universal Credit

If claimants are getting Universal Credit, DWP will reduce their Universal Credit payments to recover any transferred tax credit debts.

The amount of deduction depends on the category of the debts as well as other circumstances. DWP uses a priority order to pay back debt from benefits (for example fraud debt, advance payments, gas or electricity arrears).

Due to this priority order, initially, the deductions taken from the Universal Credit payment may not be allocated against tax credit debt.

Universal Credit automatically calculates the rate of deduction to be applied. This can vary from month to month as consideration is given to the claimant’s income and earnings which can fluctuate.

8. What happens to debt if Universal Credit ends?

If Universal Credit is no longer in payment, DWP will pursue other recovery methods, for example by deduction from other benefits or voluntary payments. Where this is not possible then DWP will pursue the recovery by deductions from pay (known as a Direct Earnings Attachment) or debt collection agencies.

9. Where claimants can go for help

The legislation limits how much money can be deducted from benefit to recover an overpayment.

This is to ensure the recovery process does not cause claimants significant hardship. The actual amount deducted will be shown on the award notification once the Universal Credit payment has been calculated.

Claimants can visit how to make a repayment if:

• they can’t afford to pay back the debt
• they want to make a one off payment
• they want to pay in full
• they wish to clarify how much they owe

10. Legislation changes

Legislation came into force in April 2016 to allow HMRC to transfer tax credit debts to DWP to consider recovery from a claimant’s Universal Credit payments, unless they tell the claimant otherwise.

Universal Credit was introduced in Northern Ireland in September 2017 following approval by the Westminster Parliament of the Welfare Reform (Northern Ireland) Order 2015 at the beginning of December 2015. Read more about Universal Credit in Northern ireland.

11. Questions and Answers

11.1 How will customers who make a claim to Universal Credit from April 2016 be advised that their debt will transfer to DWP?

Customers will be advised via a letter called ‘Your tax credits overpayments’ (TC1131). The letter will display the overpayment amounts and explain that HMRC is sending details of the amount customers owe to DWP, so DWP can recover it from their Universal Credit payments, unless DWP tell them otherwise.

11.2 When will the letter called ‘Your tax credits overpayments’ (TC1131) be sent to the customer?

At the point the tax credits debt is transferred to DWP. This will ensure the recipient is aware of their debt position before any deductions are made to their Universal Credit payments.

11.3 Will claimants be able to make payment arrangements with DWP to pay back their tax credits debts if Universal Credit is in payment?

If claimants are getting Universal Credit, deductions will be made automatically from their Universal Credit payment. This may include a percentage for tax credit debt.

The amount of deduction depends on the category of the debts as well as other circumstances (for example fraud debt or hardship arrangements)

If Universal Credit is no longer in payment, DWP will pursue other recovery methods, for example deductions from other benefits, voluntary payments, deductions from pay or debt collection agencies.

11.4 Will claimants be able to negotiate with DWP to agree new deductions if Universal Credit is in payment?

This is unlikely as Universal Credit automatically calculates the rate of deduction to be applied. This can vary from month to month as consideration is given to the claimant’s income and earnings which can fluctuate.

If the Universal Credit claim closes and there is no other benefit in payment DWP will write to the claimant and ask them to either pay the remaining balance in full, or agree a voluntary arrangement to pay by Direct Debit.

11.5 Will DWP tell Universal Credit claimants when their tax credits debts have been repaid?

No, DWP does not inform claimants of any full repayment, claimants will need to contact DWP Debt Management to check how much they owe.

11.6 What will happen if the claimant does not agree with their share of the debt showing on the letter ‘Your tax credits overpayments’ (TC1131)?

The letter will direct claimants to pages on GOV.UK, which include advice on where to go if they wish to dispute or query the amount of the debt.

The letter will contain a phone number in case they prefer to contact HMRC.