Tax Credits: DWP/DfC and tax credits debt

DWP can recover tax credits debt in two situations:

NOTE: In Northern Ireland, debts are recovered by Department for Communities (NI DfC). References to DWP should be read as DfC for claimants in Northern Ireland.

If the debt has not been passed to DWP/DfC – see our main dealing with overpayment debt page.

Quick links

Who should claimants contact about their tax credit debt?
Can DWP recover old tax credit debts?
Recovery of tax credit debts from universal credit
Transfer of non-UC tax credit debt to DWP/DfC


Who should claimants contact about their tax credit debt?

When debts pass between HMRC and DWP/DfC, it can be confusing for claimants to know who to contact. The following table indicates who should be contacted, depending on the issue/question:

Issue

Who to contact

Explanation about how/why the overpayment occurred HMRC (tax credits) – note that DWP/DfC will continue recovery even if an explanation is requested.
Challenge the overpayment by dispute, appeal or official error HMRC – note that DWP/DfC will continue recovery even if a claimant disputes the overpayment or challenges it on official error grounds. Where an appeal is lodged, HMRC should notify DWP/DfC to stop recovery of the debt.  
Questions about the apportionment of debt in joint claims HMRC
Hardship requests/difficulties paying – such as reducing the percentage of recovery from a UC award, suspending recovery DWP/DfC
Direct earnings attachment questions DWP/DfC

Can DWP recover old tax credit debts?

Claimants may contact you with very old tax credit debts, often they will say that they have not heard from HMRC for many years. It is not unusual for debts to be over 10 years old.

In theory, in England and Wales, the Limitation Act 1980 applies to tax credit debts. There is some confusion in this area because the Act does NOT apply to tax debts. This is confirmed in the HMRC DM manual. The act provides that recovery action for debts should commence within six years from the debt becoming payable. In most cases, this prevents HMRC from taking County Court action but generally doesn’t stop recovery from ongoing benefit awards or from the debt transferring to DWP for recovery (either via universal credit or separately).

The law on whether this six year rule applies is complex and advice must be obtained from a legal and/or debt specialist.

The rules are different in Scotland and Northern Ireland.

Recovery of tax credit debts from universal credit

Under the Welfare Reform Act 2012 and subsequent regulations, DWP have the power to recover a tax credit overpayment debt from UC payments. Once the UC award ends, the debt remains with DWP and negotiation for time to pay and hardship will be dealt with by DWP.

The claimant journey in these cases is explained more fully in our UC section.

Transfer of non-UC tax credit debt to DWP/DfC

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

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).

Last reviewed/updated 23 November 2021