Glossary · UK
What is Tax Credit Overpayment?
An amount of Working Tax Credit or Child Tax Credit paid in excess of entitlement that HMRC is entitled to recover, typically through reductions in future awards or direct collection.
Full Definition
Tax credit overpayments arise when HMRC pays more Working Tax Credit (WTC) or Child Tax Credit (CTC) than a claimant is entitled to in a given tax year. They are extremely common because tax credits are based on the previous year's income but adjusted at year end -- if income rises significantly during the year (for example, because a claimant returns to work or gets a pay rise), the award may have been too high for the period concerned. Overpayments also arise from errors in reporting changes of circumstances (household composition, childcare costs, working hours) or HMRC administrative mistakes. When HMRC identifies an overpayment, it issues a notice asking for repayment. If the claimant is still receiving tax credits, HMRC typically recovers the overpayment by reducing ongoing awards (by up to 25%, or up to 50% in certain circumstances). If the claimant has moved to Universal Credit, the overpayment is recovered from their UC payments. If neither applies, HMRC may seek direct repayment by sending a bill. Claimants can dispute an overpayment if they believe it arose from HMRC's error and it would be unfair to recover it -- this is called challenging the recovery of the overpayment, and HMRC will consider the claimant's account of what was told to them and when. Tax credits are being replaced by Universal Credit, but HMRC continues to administer legacy TC overpayments for years after closure.