Universal credit: Tax credit debt
This section of the website explains what happens to outstanding tax credits debt when a claimant moves from tax credits to universal credit (UC).
- Paying back tax credits debt – current arrangements
- Paying back tax credits debt – moving to Universal Credit
- Questions about transferred debts
- The claimant journey
- Joint claims
- Recovery rates in Universal Credit
- DWP powers to recover tax credit debts
Currently tax credit claimants pay back debts either directly (through a payment plan) or by having their tax credit award reduced.
We explain more about the recovery methods in our dealing with tax credit debt section.
Under legislation in the Welfare Reform Act 2012 and subsequent regulations, DWP have the power to recover tax credit overpayment debts from Universal Credit (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.
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.
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|
Once the UC claim has been made and the tax credits claim stopped, HMRC should send the claimant a letter TC1131 – ‘Your tax credits overpayments’. An example of this letter can be found here.
HMRC will only transfer ‘safe’ debts to DWP which means if a person is appealing or has an active dispute against a debt it should not transfer. As debts can transfer to DWP at different times, claimants may receive more than one TC1131. No action needs to be taken as a result of this letter unless the claimant wants to challenge an overpayment.
Any time to pay arrangement (normally by direct debit) that the claimant already has with HMRC (or a private debt collector working on their behalf) will be stopped automatically. Claimants who are repaying by standing order will need to cancel it with their bank.
Tax credits operate joint and several liability which means HMRC can ask one or both partners to repay a joint debt. However, their policy set out in COP 26 is that when there is a household breakdown (the couple separate) they will split the debt 50/50 (unless the claimants agree to a different split) and as long as one claimant pays back their 50%, HMRC won’t pursue them for the remaining 50% even if their ex-partner does not pay.
Our understanding is that, where claimants separate, HMRC will split the debt 50/50 before transferring the 50% to DWP for recovery from the single claimant’s UC. Each person should be notified separately of their part of the debt. Any dispute about the apportionment of the debt should be dealt with by HMRC.
From April 2021, there are 2 main rates of recovery in UC:
- 15% of the standard allowance (non-fraud debt if you don’t have earned income)
- 25% of the standard allowance (non-fraud if you have earned income and fraud classified debt)
NOTE: Prior to 3 April 2021 there was a third recovery rate - 30% of the standard allowance for fraud classified debt or repaying a hardship payment.
Which recovery rate applies depends on the claimant’s circumstances and can change from month to month.
Where the claimant also has a historic housing benefit debt that is being recovered – DWP guidance states that a single deduction will be taken from UC but the recovery will be allocated equally between the two debts (or three debts if there is also a UC overpayment being recovered).
DWP guidance states the maximum amount that can be deducted from a UC claimant’s award is 25% of the standard allowance (initially this was 40% but was reduced to 30% in October 2019). There are two exceptions to this:
- Deductions for normal consumptions of utilities do not count towards the 25% maximum
- If a sanction or penalty is being applied, or if an advance is being recovered, priority deductions i.e. housing and fuel costs are still taken even if the total amount of deductions is higher than 25%.
A maximum of three third party deductions are taken at any given time and if there is insufficient UC to meet the deductions the priority order list is applied. Tax credit fraud overpayments are number 17 on the priority list and normal tax credit overpayments number 19.
Regulations introduced in April 2015 allow DWP to recover tax credit debt concurrently with HMRC. These regulations are made under Section 126 Welfare Reform Act 2012 (which allows any tax credit functions to be transferred to DWP). The regulations allow DWP to recover tax credit by any of the methods it uses to collect its own debt, including deduction from benefit and Direct Earnings Attachment.
In February 2017, the Government announced that they would exercise these powers. After several delays, HMRC eventually introduced the process from June 2019. From June 2019, HMRC are transferring a segment of their tax credit debt to DWP for them to recover. See our section 'DWP and tax credits debt (non-UC)' for more information.
NOTE: This is separate to the transfer of tax credit debts 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.
We have written some detailed information about this process in our tax credits section.
Last reviewed/updated 1 July 2022