Simple steps to stop tax credit debt deductions causing harm
By Ed McDonagh, Senior Public Policy Advocate
Our new report, The true cost of tax credit overpayments: A fairer approach, published today, starkly demonstrates how the collection of tax credit overpayments through deductions from Universal Credit (UC) by the Department for Work & Pensions (DWP) is causing stress and hardship.
98% of StepChange clients surveyed told us that they struggled to cover essentials because of an unaffordable deduction taken to repay tax credit debt. Less than 1 in 3 clients were aware of when and how much money was going to be taken before they experienced the deduction. Just 11% of vulnerable clients felt they were treated fairly by the DWP.
Much of the harm that is caused is unnecessary. Simple changes to the system like a more precise assessment of affordability, clearer communications and better identification of vulnerabilities could alleviate the worst impacts.
Under the current system up to 25% of someone’s allowance can be taken to repay tax credit or other benefit overpayments without a check as to whether this is affordable. For other debts like money owed to utility companies there is a 5% limit. While it is possible to contact the department renegotiate a reduced rate of repayment, this isn’t enough to safeguard against harm.
StepChange clients with tax credit overpayment debts face extremely challenging circumstances. They are more likely to have an additional vulnerability on top of their financial difficulties and have around £80 less disposable income per month compared to the average levels we see for all clients. It is also widely recognised that current benefit levels are close to subsistence levels. In this context, the government must take a more considered approach.
A default limit of 5%, bringing overpayments in line with other non-priority deductions, would better safeguard against detriment. This alone would not be enough, however, as repayment needs to be linked to individual circumstances. There must be more proactive steps to assess affordability. The data available within UC should allow DWP to adjust repayment rates rather than relying on people in difficulty to come forward. For those unable to afford repayments token payments of £1 a month should be accepted.
In many cases individuals are unaware deductions are to begin and are left largely in the dark about how they built up an overpayment debt. In 2019, 68% of tax credit overpayment debt related to claims made before 2016 with nearly a fifth relating to pre-2011 overpayments.
Since 2017 these debts have been transferred from Her Majesty’s Revenue and Customs (HMRC) to DWP. It’s vital that more details about debts are shared as part of this transfer so that DWP can explain to people facing deductions how they incurred an overpayment. Communications about deductions also need to be improved, these should be tested with key demographics and changes made to ensure people are properly informed about when and how much money will be taken from their claim as well as how long they will receive a reduced benefit.
There is currently no policy to write off historic debts. This contrasts with the financial services sector where a combination of the Limitation Act 1980 and FCA rules mean that debts older than 6 years cannot be pursued. The government should consider applying a consistent principle for debt write off. The nature of the tax credit system mean overpayments are common and generally not caused by deliberate errors by claimants. Writing off debts older than 6 years would replicate a principle of fairness long accepted in the regulated financial services.
Poor communication about overpayments and deductions is compounded by relatively limited systems to identify vulnerabilities. People are not directed to the support that could help them deal with repayments and the system mostly relies on people coming forward to disclose vulnerabilities before adjustments are made.
Regulators in essentials services like Ofgem and Ofwat have launched comprehensive vulnerability strategies requiring companies to use smart data to identify those in need of additional support and hold suppliers to account according to metrics designed to shift the culture of debt collection. Government departments including DWP should better use data to pick up vulnerabilities early, while debt management teams should be subject to performance measures to incentivise meaningful adjustments for vulnerable individuals.
With £3 billion of tax credit overpayment debt now on DWP’s books and another £2.4 billion still to transfer, the government must urgently take steps to level up its standards to match better practice seen in regulated sectors. Deduction rates should be tailored according to an assessment of affordability and limited to 5% with legacy debts written off. Proxy data should be used to identify vulnerabilities with adjustments made accordingly and communications should be reworked following consultation with key demographics to ensure people understand how they incurred debt and how it will be collected.
Most of these changes could be made with changes to internal systems rather than requiring policy or regulatory overhauls. To avoid tipping more households into hardship it’s vital that the government seizes the opportunity to make these improvements and meet its responsibility to support financially vulnerable households.
