In the case of overpayment of tax credits by HMRC, individuals are informed by the authorities through a letter stating the amount of overpayment and the mode of deduction. Through this blog post, we will explore in detail how individuals faced with such a situation can repay overpaid tax credits to HMRC and the options available to them in case they are unable to afford to be able to do so. Additionally, we will also discuss how incomes are taxed, tax codes calculated and which incomes are tax-free. 

How Can I Repay Tax Credits Overpayment?

If you have been overpaid tax credits by the HMRC, they will inform you of the amount that is due from your end and the mode of repayment. However, how you repay an overpayment of tax credits to HMRC depends on the following factors:

  • you still get tax credit payments
  • you are claiming Universal Credit
  • you are receiving neither tax credit nor Universal Credit

If you still get tax credits, HMRC will simply reduce your tax credits to account for the overpayment. The amount that is reduced each month will depend on how much you receive from them and your household income. Below are the details of this reduction:

  • if your household income is £20,000 or less and you get maximum tax credits, the reduction will be10%
  • if your household income is £20,000 or less and you get less than the maximum tax credits, the reduction will be 25%
  • if your household income is more than £20,000, the reduction will be 50%

If you are claiming Universal Credit and have overpaid tax credits, your future payments will be reduced by the HMRC until your dues are cleared.

If you receive neither tax credits nor Universal Credit, you will be sent a “notice to pay” by HMRC which you must pay within 30 days. 

If you are getting pension income or are in PAYE employment, the HMRC can readjust your tax code to recover overpaid tax credits as well. The amount that is recovered and deducted each month will depend on your monthly income.

Tax credit overpayments can be repaid in any of the following ways:

  • Direct debit
  • Online and telephone banking
  • At your bank or building society
  • By cheque through postal service

You should include the following with your payment:

  • your name, address and phone number
  • your tax credit reference number
  • how much you’re paying
  • the period you’re paying for

What Happens If Someone Cannot Afford Repayment of Overpaid Tax Credits?

If you cannot afford to repay your overpaid tax credits due to financial hardship, you should write an application to HMRC. They usually consider such situations and reduce the amount that is deducted each month (this may increase the number of your instalments while giving you a monthly relief.

You can request HMRC for the following if you are unable to repay overpaid tax credits as per their schedule of deductions:

  • how much do you have to pay back in each instalment
  • how long do you have to pay the money back
  • the way you pay the money back

However, HMRC will ask you to share details of the following when you apply for consideration in lieu of your financial situation:

  • any savings and income that you may have; this includes benefits and pensions
  • your living expenses; which include rent, mortgage or childcare payments and household costs
  • any other repayments that you have to make; including loans, credit cards and utility bill repayments

What Is A P60 Tax Refund?

A P60 is an annual certificate sent by HMRC to taxpayers. It contains details of their annual earnings and tax deduction. To claim a tax refund using the P60 form, claimants will need to share the following details with HMRC:

  • their earnings in total
  • the amount of income tax that they have paid
  • the amount of income tax that they have paid in excess

Additionally, they must also provide details of their National Insurance number and employer reference number.

In the case that a taxpayer has overpaid their tax due to any of the following reasons, 

  • being put on an emergency tax code due to starting a new job,
  • having two jobs simultaneously, or
  • switching from a full time to a part-time job

they can reclaim the amount from HMRC after the end of the tax year. Claims for overpaid taxes can be made for up to four years. This means that an overpaid tax in 2022 can be claimed until 2026.

You will also need your P60 form in the following situations:

  • to reclaim overpaid tax
  • to apply for tax credits
  • to serve as proof of income (if someone applies for a loan or a mortgage)

What Should I Do To Reclaim Overpaid Taxes On Pension?

To reclaim overpaid taxes while withdrawing funds from their pension, you can use the P55 introduced by HM Revenue and Customs for the tax year 2021-22. 

This form is only to be used if claimants:

  • do not have a P45
  • are not employed to work
  • are not claiming benefits

To access the P55 form online, claimants can use their Government Gateway user ID and password. If they don’t have one, they can register for the same.

The P55 form can be filled out online or by taking a printout and should be submitted to the HMRC by overtaxed individuals who fulfil the following conditions regarding a withdrawal from their pension pot: 

  • they have withdrawn a part of their pension
  • they will not be making regular withdrawals
  • their pension body has not made a refund

As a basic taxpayer, you would have been taxed at 40 per cent for making withdrawals from your pension. By filling in the P55, you are making a repayment claim to the HMRC to be repaid the excess tax deduction. If you fail to do so, you will have to wait until the end of the tax year for HMRC to pay back this amount. 

How Are Tax Codes Calculated?

Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer or pension provider the amount of tax-free income that you are eligible for in that tax year. 

The following steps are followed by the authorities while assigning tax codes:

  • Step 1: Your tax allowances are calculated. In most cases, this is an individual’s personal allowance added to any other allowances and job expenses.
  • Step 2: Your deductions are calculated. These are incomes for which tax has not been paid and may include any part-time work or certain state benefits.
  • Step 3: The deductions are subtracted from the tax allowances. The result is your pre-tax income. If this amount equals personal allowance, your income remains tax-free.

How Much Income Tax Do I Have To Pay?

Incomes above the minimum cap are taxed at an incremental rate of 20 per cent to 45 per cent depending on whether an individual belongs to the basic, higher or additional tax rate band. Below are details of these bands:

  • 0 per cent income tax when income is up to £12,570
  • 20 per cent income tax when income is between £12,571 and £50,270 
  • 40 per cent income tax when income is between £50,271 and £150,000 
  • 45 per cent income tax when income is above £150,001

If you are self-employed, you are required to file a self-employed tax return to pay your taxes through a self-assessment. 

Which Incomes Are Tax-Free?

Incomes derived from any of the following sources are considered to be tax-free in the UK:

  • Transport costs of an employee’s (and their immediate family) relocation for work in the UK
  • Winnings from games, pool betting, lotteries or competitions with prizes
  • Long service employee awards (certain limitations apply)
  • Individual savings account amounting to £20,000
  • Incomes such as interest or dividends arising from savings accounts 
  • Pensions paid to war widows and dependents
  • Social security and state benefits include maternity allowance, employment and support allowance, attendance allowance, child tax credit and housing benefit. 

Conclusion:

Overpaid tax credits can be repaid to HMRC in many ways including direct debit, online transfer or bank cheques. However, the amount that an individual will pay back will depend on whether someone still receives a tax credit, Universal Credit or neither of the two. If you are unable to repay your overpaid tax credits as per the HMRC schedule of payments, you can apply for relaxation on the amount to be paid in full as well as a concession on the monthly instalments.

FAQs: How Can I Repay Tax Credits Overpayment?

Can tax credit overpayments be written off?

Tax credit overpayments are rarely written off, even though HMRC can consider an individual’s application to reduce the total amount to be paid or ease in instalments due to financial hardship. In the rare case that HMRC does release a person from overpaid tax credit debt, it is termed a remission.

How long do I have to pay back a tax credit overpayment?

Individuals are usually assigned a 30-day time limit to start repaying their overpaid tax credit. The amount of time it takes to complete their repayment will depend on the amount due and the monthly instalment that is due. Should they be unable to meet this deadline, they must inform the Department for Work and Pension.

Can you go to jail for tax credit overpayment?

If you know that you have been overpaid tax credits and you choose to hide this information on purpose, you will be committing benefit fraud. For this, you can be sentenced to a jail term and be asked to pay back the excess amount.

Do HMRC automatically refund overpaid tax?

HMRC does refund overpaid tax; sometimes it is done automatically while at other times, claimants need to file an application to claim a refund.

How do I get my HMRC debt written off?

While it is not general practice to have an HMRC debt written off; it is possible in rare cases. HMRC debts can be written off through a debt solution such as IVA. This is an agreement between debtors and creditors to pay back debt through instalments over a period of time. Any unpaid amount after the due time is written off.

References: 

Discussion: Tax Credit Overpayment – Rightsnet

Tax credits overpayments: If you cannot afford your repayments – GOV.UK

Paying back a working or child tax credits overpayment – Citizens Advice

How to repay your tax credits – GOV.UK

COP26 – What happens if we’ve paid you too much tax credit?

P60 tax refund examples – what do you need to know?

Claim back a flexibly accessed pension overpayment – GOV.UK

Form P55 for the tax year 2020-21 | CIPP.

What Is A P60?.

P45, P60 and P11D forms: workers’ guide

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John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.