Call for DWP to improve historic tax credit overpayment deductions practices

24th September 2021

Deductions from Universal Credit used by the Department for Work and Pensions (DWP) to collect historic tax credit overpayments are leaving households unable to pay for rent, food and groceries, according to a new report from StepChange Debt Charity.

The survey data has revealed that 98% of StepChange clients experiencing such deductions struggle to cope, and 59% borrow to cover the shortfall.

With over £3bn of tax credit overpayment debt having transferred from HMRC to the DWP since 2017 and over £2bn still to pass across, these practices urgently need addressing. Many people are finding up to 25% of their allowance taken without a check to see if this is affordable, for previous overpayments they were often unaware they had received. A typical StepChange client with tax credit debt faces a £46 monthly shortfall even after a lower rate deduction of 15%.

The 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 did not know collections were going to start before money was taken from their Universal Credit claim, and 70% of respondents did not 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.

 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. This lags behind standards in other regulated sectors, with the Financial Conduct Authority, Ofgem and Ofwat all having launched comprehensive vulnerability strategies in recent years, which set out clear expectations for identifying and responding to vulnerabilities such as mental health conditions and physical disabilities.

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:

  • 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
  • Tax credit debts over six years old should be written off, and debts that will take over ten years to repay should be reduced to affordable levels.
  • 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.”