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Tax credit overpayment deductions force vulnerable into debt

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Written by: Emma Lunn
23/09/2021
Debt charity StepChange has urged the Department of Work and Pensions (DWP) to improve historic tax credit overpayment deductions practices that leave benefits claimants struggling.

The DWP uses deductions from Universal Credit to collect previous tax credit overpayments. But StepChange says this practise is leaving many households unable to pay for rent, food and groceries.

A survey by the charity found that 98% of StepChange clients experiencing such deductions struggle to cope, with 59% borrowing money to cover the shortfall.

More than £3bn of tax credit overpayment debt has been transferred from HMRC to the DWP since 2017 and more than £2bn is still to pass across. Many people are having deductions taken from their benefits for previous overpayments they were often unaware of.

StepChange’s report, The True Cost of Tax Credit Overpayments, examines the issues and suggests several practical steps that could be taken now that would improve DWP practices and reduce the harm being caused.

A recurring issue for the clients StepChange surveyed was the lack of clear communication. An overwhelming majority of those surveyed said the information they received was unclear. Two thirds of respondents didn’t know collections were going to start before money was taken from their Universal Credit claim, while 70% of respondents didn’t know how much money was going to be taken.

While it is possible to renegotiate the rate of repayment, the report found a third of respondents were unaware of this option.

One benefits claimant told StepChange: “I think that before taking such a big deduction from benefits they should at least send some communication informing you and find out if it’s affordable. When you have problems with anxiety or depression it’s much easier to respond to a communication to make an arrangement in advance than it is get in touch off your own back because you didn’t know that they planned to take it.”

StepChange says the DWP’s processes to proactively identify vulnerability appear to be ‘woefully lacking’, while even those clients who make efforts to disclose their situation are frequently not treated appropriately.

Two in five vulnerable clients surveyed in the report hadn’t made the DWP aware of their issue, while only 11% of those who had felt they were treated fairly.

StepChange is urging the DWP to improve practices and reduce the hardship caused by the collection of tax credit debt. The report identifies several practical measures that could be implemented without legislation.

For example, it says the DWP should assess affordability before determining the rate of repayment, reducing the maximum deduction for tax credit overpayments from 25% to 5%, and introducing a new minimum deduction of a £1 token payment for those who can’t afford any more.

It also suggests that tax credit debts over six-years-old should be written off, and debts that will take more than 10 years to repay should be reduced to affordable levels.

StepChange also says that the DWP needs to use and share data effectively to improve the identification of vulnerability and targeting of communications and support about tax credit overpayment deductions.

Peter Tutton, head of policy at StepChange said: “The lack of focus on the consequences of benefit deductions, which the Department for Work and Pensions uses to collect tax credit overpayments, is causing real harm. Almost every respondent to our survey told us that deductions from their benefit payments had been unaffordable, which should act as a wake-up call.

“An essential first step is that the DWP needs to ensure no one is pushed into hardship by unaffordable repayments. The maximum deduction should be reduced to 5% with flexibility for lower affordable payments and debt reduction so that no one is pushed into hardship of left making repayments for decades. A limitation period should be applied as it is in regulated financial services writing off historic tax credit as HMRC has done in the past.

“These legacy debts often come as a shock to people who are unclear as to how they have ended up owing the government money. Communication must be improved so that people are properly informed, with better identification of vulnerabilities, and better tailoring of support.

“The DWP needs to act urgently to stop benefit deductions from causing avoidable harm. More broadly, we also need to see a wholesale review of the way government collects debt, starting with the cabinet office’s upcoming response to the call for evidence on government debt collection practices.”

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