Households ‘struggling to cover essentials after legacy debt deduction’

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The hardships some households are facing due to the collection of historic tax credit overpayments must be reduced, a charity has said.

StepChange Debt Charity said some people are unable to pay for essentials.

Tax credit overpayments are among the debts collected through deductions from Universal Credit following a previous agreement between HM Revenue and Customs (HMRC) and the Department for Work and Pensions (DWP).

According to StepChange’s survey data, 98% of clients experiencing such deductions struggle to cope, and 59% borrow to cover the shortfall.

Nearly nine in 10 (89%) clients surveyed had a payment taken which they could not afford.

One client told StepChange: “They are taking £100 per month, leaving me needing the food bank and struggling with utilities.

“I am a single mum and have lost my part-time job. Financially I don’t have enough. We depend on the Universal Credit which is not enough for feeding my children as I can’t afford the electric and gas bill.”

Some people are finding up to a quarter of their allowance is taken without a check to see if this is affordable, for previous overpayments they were often unaware they had received, StepChange said.

It added that a recurring issue from its findings is a lack of clear communication, with around two-thirds claiming they did not know collections were going to start before money was taken from their Universal Credit claim.

Processes to proactively identify vulnerability also appear to be lacking, the charity said and even those clients who made efforts to disclose their situation were frequently not treated appropriately.

It added that 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.

StepChange said it is urging the DWP to improve practices and reduce the hardship caused by the collection of tax credit debt.

Tax credit debts that are 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, it said.

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 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.”

He also called for a wholesale review of the way Government collects debt.

A Government spokesperson said: “We carefully balance our duty to the taxpayer to recover overpayments with our support for claimants. Safeguards are in place to ensure deductions are manageable, and in April we further reduced the cap on deductions from Universal Credit awards.

“Customers should receive multiple notifications about their overpayment. They can contact DWP if they are experiencing financial hardship in order to discuss a reduction in their rate of repayment, or a temporary suspension, depending on financial circumstances.”