Tax Credits: DWP and tax credits debt (non-UC)
In February 2017, the then Secretary of State for the Department of Work and Pensions (DWP) announced that a segment of tax credits debt was to be transferred from HMRC to DWP or, where applicable, the Northern Ireland Department of Communities (NI DfC). The debt - made up of outstanding tax credit overpayments - would then be collected by DWP or NI DfC, as appropriate.
This exercise is separate to the transfer of tax credits when someone claims Universal Credit. Under this process, the person may not be claiming any DWP benefits and this may be their only interaction with DWP.
- Why transfer the tax credit debt to DWP/NI DfC?
- Who is affected?
- How do claimants know if their tax credit debt has been transferred to DWP?
- What is a direct earnings attachment?
- Are there any other ways to pay off the debt?
- What if claimants can't afford to repay?
- What if claimants don't agree that they owe the money?
- What if the debt is a joint debt?
- The debt is from many years ago, does it still have to be repaid?
DWP and NI DfC have some different legal powers to HMRC which mean they have more options available to them to collect outstanding debts from individuals. One of the key differences is that DWP and (NI DfC) can collect outstanding debts directly from an individual's pay, using a direct earnings attachment, without the need to first take the individual to court.
Transferring the outstanding tax credit debts to DWP (or NI DfC) for them to recover the money instead of HMRC allows them to use this option. It is, of course, also in line with longer-term changes at HMRC as they very gradually reduce their tax credit operations as more and more people move over to universal credit (UC).
This may affect anyone who has claimed tax credits if all of the following points apply:
- They claimed tax credits in the past
- They are no longer receiving tax credits (or are receiving them but the old debt cannot be recovered from the new award)
- They have an outstanding tax credit debt which is not being repaid directly to HMRC
- HMRC records show them as being in current employment with minimum set annual earnings of £5,200 in the previous 12 months
HMRC expect to transfer around 600,000 outstanding tax credit debts to DWP or NI DfC under this project.
Tax credit overpayments are very common, many are built into the design of the system. Claimants should have been notified that they had an overpayment on their final tax credit award for the relevant tax year. However, in our experience, many people struggle to understand the award notices and often such debts would be recovered gradually from ongoing payments and may have gone unnoticed.
It can come as a shock when someone leaves tax credits to find that they have a large overpayment debt. However, even if they did not receive the final award notice or did not understand it, HMRC should have written to them when their tax credits ended to request that the debt is repaid directly - generally called a notice to pay. Even so, in some cases, it may be a number of years since claimants received any contact from HMRC about these debts. (See below for more information about the recovery of old debts).
Under the debt transfer arrangements, HMRC will write to claimants if their debt is to be transferred (letter TC1131 non-UC) to DWP (or NI DfC). HMRC have said that the letter will state the amount of the outstanding debt and explain what will happen next.
Following the issue of the letter (TC1131 non-UC) from HMRC, DWP or NI DfC if they wish to discuss their case or set up a repayment plan. Claimants will have up to 21 days to make contact, and if they fail to do so within that period, DWP and NI DfC will write to them and their employer to tell them that Direct Earnings Attachment action should commence.
A direct earnings attachment, sometimes called an 'attachment of earnings', is a legal mechanism for collecting outstanding debts directly from earnings. It means a creditor (the person who is owed the debt) can require the debtor's (the person who owes the debt) employer to take payments to repay the debt directly out of the debtor's earnings. In most cases, direct earnings attachments are set-up through court arrangements but by law, DWP and NI DfC, can set up direct earnings attachments without having to go through court.
The payments are taken from the earnings, after tax and NI has been deducted. Employers can also add a £1 administration charge to each payment that is taken. There are strict limits about the level of payments that can be directly taken out of earnings, although these are based on a percentage rate, not a fixed amount and there is a sliding rate which is related to the level of gross pay. In all cases, a minimum of 60% of net earnings must be left for the individual.
Some detailed information about direct earnings attachments is available on the GOV.UK website.
DWP (or NI DfC) should contact the individual to agree and set up the most suitable arrangements to repay the debt. This might be by:
- repaying the amount to DWP (NI DfC) in a lump sum
- reducing the person's other benefits
- agreeing a repayment plan
- asking the employer to take money from their earnings
- asking a debt collection agency to collect the money
If claimants can't afford to repay the debt, they will need to discuss this with DWP or NI DfC. It might be that another method of recovery is appropriate, or that arrangements are made so that the DEA commences after other deductions cease. A DEA should not be set up if deductions from benefit are in place.
The debt may be from some time ago. This means the strict time limits associated disputes and appeals will most likely have passed by the time the debt is transferred to DWP (NI DfC), leaving no formal route to challenge other than complaint.
In some cases, a late appeal or an official error challenge may be possible.
If the claimant disagrees with the creation of the debt in the first place, how much had been paid to HMRC, or with how the outstanding value was calculated by HMRC before transfer to DWP and NI DfC, they should ring HMRC on the Tax Credits Helpline.
If they have a query about the amount DWP and NI DfC have recovered, future recoveries or the current balance outstanding then they should contact DWP/NI DfC. There will be occasions when individuals may contact the wrong Department but on receipt of such a query, DWP and NI DfC and HMRC staff should have appropriate guidance and contact details to signpost the claimant to the correct contact.
If the overpayment arose on a joint award and the person is no longer part of that couple, HMRC will apportion the outstanding amount to be recovered. This is generally done on a 50/50 basis. If the person disagrees with the amount apportioned, they should contact HMRC upon receipt of the TC1131 to discuss the overpayment amount.
Where people remain as part of the same couple, both individuals will be eligible for transfer to DWP/NI DfC. Both will be sent individual communications to advice them that their debt has been transferredand will now be considered on an individual basis. The debt will be apportioned on a 50/50 split. Again, HMRC should be contacted if the individual disagrees with the apportionment of the debt on a 50/50 basis.
In England and Wales, the Limitation Act 1980 provides that recovery action for debts should commence within six years from the debt becoming payable. Tax debts are not covered by this law, but tax credit overpayment debts are, in theory. In most cases. this prevents HMRC from taking County Court action but generally doesn't stop recovery from ongoing benefit awards.
The law on whether this six year rule applies is complex and anyone who thinks it might apply should seek legal and/or debt advice from a specialist.
Last reviewed/updated 2 August 2021