Tax Credits: Overpayments and underpayments
The tax credits system ended on 5 April 2025. This section of the site remains in place for ongoing tax credit issues such as tax credit debts, disputes, appeals, complaints and compliance checks.
Overpayments and underpayments were a normal part of the tax credits system. This is because when a tax credits award was made it was not final until a final entitlement decision was made which was usually after the end of the tax year for which it had been given or shortly after a claim ended during a tax year (where a person was sent a migration notice or tax credit closure notice to claim universal credit or pension credit).
This section of the website gives a brief view of overpayments and underpayments.
- The annual nature of the system
- What are overpayments?
- Causes of overpayments
- Underpayments
- Challenging overpayments
- Dealing with overpayments
The annual nature of the system
The tax year ran from 6 April in one year until 5 April in the next year. To start with the award was based on existing circumstances in the current year - the year of claim (for example, working hours or the number of children a claimant has responsibility for) but using income from the previous tax year.
It was possible in certain circumstances to have the award changed and based on a current year estimate if the claimant anticipated their income would be less than the previous year. However, it was possible for an overpayment to occur if the estimate turned out to be too low. See our section understanding the disregard for an explanation of how this occured.
After the current tax year ended, when income and circumstances and any changes during the year were known in full, HMRC then considered any adjustments. This adjustment process could, but did not always, throw up underpayments or overpayments. This annual design meant that overpayments could, and did, occur without fault by HMRC or the claimant.
It was also difficult to ascertain from an award notice whether or not there was an overpayment. Generally it was shown in Part 3 of the award notice as shown in the example below -
Overpayments occurred when, as the law says:
'... the amount of tax credit paid for a tax year to a person or persons exceeds the amount of the tax credit to which he is entitled, or they are jointly entitled, for the tax year. (Section 28 Tax Credit Act 2002)
The law goes on to say that HMRC may decide that the amount of the excess, or any part of it, is to be repaid to them. It also allowed HMRC to adjust the award during the year in order to reduce or eliminate the likely overpayment.
Similarly, HMRC were able to decide to treat any tax credit already paid as an overpayment, if they decided that the claimant was not entitled to it.
The law gave HMRC complete discretion over whether to collect any overpayment, and how much of it to collect, or whether and by how much to adjust an award during a year in order to prevent an overpayment arising.
Tax credits were designed to follow changes in income (to an extent) and personal circumstances. There were a number of reasons why an overpayment might arise following such a change:
- A large increase in income from one year to the next. (This was less likely to occur when the income disregard for rises in income was £25,000 but has been much more likely since April 2013 when it reduced to £5,000 and then further reduced to £2,500 from April 2016)
- The claimant was late reporting a change in circumstances that caused their entitlement to fall – perhaps a drop in working hours, a change of household or a child leaves full-time education, etc.
- The claimant repored an estimated current year income which turned out to be too low
- HMRC delayed processing a reported change.
- The claimant made a mistake in their own favour on the claim form or renewal form.
- HMRC made a mistake, whether human or computer error, or gave the claimant erroneous advice which they acted upon to their detriment.
- An award was adjusted downwards following an investigation by HMRC.
- The payments that were received in the first few months of a new tax year (from April), before the renewal forms were processed, were too high.
- The claimant failed to complete their renewal forms on time (and did not have the claim reinstated by contacting HMRC within the designated time limit).
- Where in-year finalisation process was used - it could create a tax credit overpayment due to the way income is calculated for in-year finalisations. See our Universal Credit - finalising tax credits section.
Underpayments occured when an award for a tax year is finalised and it is found that HMRC had paid the claimant less that their finalised entitlement. Section 30 Tax Credit 2002 covers underpayments and states that they must be paid to the claimant.
We understand that where an underpayment arises, if the claimant has an outstanding overpayment from a different award or different year, HMRC will look to offset the underpayment from the outstanding overpayment. If there is any of the underpayment amount left after the overpayment has been cleared, HMRC will forward that residual payment to the claimant. If there is no underpayment amount left but the outstanding overpayment amount has been reduced, HMRC will send the claimant a revised TC1131a letter to tell them about the change to their outstanding debt figure. This is also the case where HMRC have transferred the overpayment to DWP to recover.
Most advisers are likely to see tax credits claimants who want help to understand an overpayment and challenge it. You can find detailed information about how to do this in our challenging overpayments section.
You can find information on how to deal with overpayments, repayment, in our how to deal with overpayment debt section.
Last reviewed/updated 10 April 2025