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Tax credits debt and a debt management plan

Tax credits debt and a debt management plan

It is difficult to include tax credits overpayments in a debt management plan. It is usually better to agree a separate payment agreement with HMRC if possible.

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Can you include tax credits overpayments in a debt management plan?

It is not normally possible to include tax credits debt in a debt management plan (DMP).

The main issue is that the Plan is not a legally binding agreement. Because of this, HMRC are allowed to continue taking enforcement action against you if they refuse the payment offer being made.

They will often refuse because they require the money you owe to be repaid within a maximum of 12-18 months. Generally speaking, these timescales are not realistic if you are using a debt management plan because it will usually last much longer than 18 months.

Where you are still eligible to receive tax credits, a DMP is even less likely to be accepted. This is because HMRC can simply reduce the ongoing benefits you receive to recover the overpayment.

Should you make a separate agreement to pay these debts?

Given the difficulties with including tax credits debt in a debt management plan, the best option is to exclude it.

You should first look to set up a separate agreement directly with HMRC. This will ensure you offer to repay what you owe in timescales they are happy with. You can then implement a DMP with your remaining creditors.

You can include the HMRC repayment as an expenditure item in your living expenses budget. Your other creditors will accept this as it is seen as a priority debt.

Of course, the main problem with negotiating a separate agreement with HMRC is whether or not you will then have sufficient funds left over to start a DMP to pay your other debts. Remember, you will normally need a minimum of £100/mth to set up a Plan.

Once the tax credits debt has been paid you can then increase your DMP payments. This will ensure the rest of your debt is repaid faster.

Alternative options for repaying tax credits debt

Negotiating a separate repayment plan to manage your tax credits debt is all well and good. But what if this leaves you with no surplus income left for a debt management plan with your other creditors?

A DMP is unlikely to be suitable for you in these circumstances. You should therefore think about using a more formal debt solution such as an IVA or bankruptcy.

If you are a home owner, it is likely the best option for you will be an IVA. You can include tax credit debt in an IVA. This solution also ensures that your home is protected.

Where you live in rented accommodation, you may be better off going bankrupt which would mean you would not have to make any further payments towards your debts if you could not afford to do so.

Need help with tax credits debt? Give us a call (0800 044 5407) or complete the form below. The advice is free and confidential.

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