Money mensch: Making the most of your tax credits
Now the tax credit renewal system is over, millions will be receiving the dreaded letter from the government telling them they have been overpaid tax credits, and will have to pay hundreds or even thousands of pounds back. I want to tackle some of the key questions, so as to let you know what to do.
What are tax credits?
Tax credits are a payment directly into your bank account from the government, just like benefits. The idea behind them is to either help people with children or to help working families stay in work by making sure they get more from working than by claiming benefits. The net of people eligible for tax credits is wide, from those on low incomes right up to some families earning £66,000 a year. And the payouts can be huge. Unfortunately, this means the amounts you have to pay back can also be huge.
Why do overpayments happen?
Part of the problem is that the amount of money you are eligible for depends on your situation this year, but is estimated by your position last year. So any minor change can have a big impact. Any time your tax credit status changes, you should phone to tell the tax credit office immediately to avoid overpayments. Yet even this is not foolproof.
What about underpayments?
Dealing with this is quite easy. Before July 31, you either had to check the form to ensure the information was correct or sign the declaration and send it back. At that point, you are not just renewing your tax credit application for the coming year but, as it is based on the previous year’s income, it is evaluating whether you were correctly paid. If you were not given enough cash, you should receive extra money to make up for the underpayment. So, for some people, more cash will be coming through the door.
Do I have to pay back an overpayment?
The tax credit office had a terrible reputation in the early years because of the number of overpayments. This has improved, but as the system works out what you will get this year based on your situation last year, it means that, for many people, overpayments are a necessary part of the system. They might happen because you did not inform the tax office of changes in your circumstances in time. If that is the case then you will probably be obliged to pay it back. The golden rule is: tell the office. An overpayment might also happen if the tax office made a mistake in its calculations or took too long to update its records once you informed it of any changes. Either way, you should not have to pay back this overpayment as long as you have updated the tax office in time.
How do I contest a demand for a repayment I think is unfair?
In a nutshell, if the tax office is at fault and you correctly notified it in time of any changes you will not have to repay. If you have been told that you have been overpaid, the first thing to do is call up the tax credit helpline to find out why. Then follow up any issues in writing.
What if it is the tax office’s fault?
There are two different processes you can embark upon if you think a mistake has been made: either a dispute or an appeal.
You must fill in the form within a month of being told about the overpayment, which is why it is crucial to act quickly. A dispute occurs where you informed the office correctly, but it made a mistake. An appeal happens when the office is asking for money back that it should not be asking for. An example would be if it paid as if you had two children when you actually have three. It is absurd that there is not just one process for appealing against overpayments but we simply have to pick our way through the system.
If you need to reclaim overpayments, you can get guidance at www.moneysavingexpert.com/taxcredits
What if I cannot afford to pay back the money?
Exactly how you pay depends on one of two categories. Firstly, if you are still getting tax credits, it is likely that future repayments will be reduced to recoup the cash you have already been paid. This is usually between 10 and 25 per cent of your payments although it could be more if you are a high earner. If you have had a series of overpayments, the office is not allowed to deduct the new overpayment until it has finished clearing the previous one. If you are in the second category of people whose payments have stopped then you will normally get a letter asking for money within 30 days. If this applies, and you cannot afford it, contact the tax office and politely inform it. It is usually possible to spread the repayments over a year. If the situation is such that you will never be able to repay them, then it has the power to wipe them.
Should I be getting tax credits?
It is worth checking out whether you are eligible. You might not think you are, but if you are paying for childcare, the average tax credit for childcare alone is £3,500 a year. You can use the website www.entitledto.com to give yourself a tax credit check-up. Alternatively, the government has its own calculator on the HMRC website at www.hmrc.gov.uk or you can call the tax credit helpline on 0845 300 3900.
The system is very complex, but there is a lot of money available, so it is worthwhile investing some time.