The number of people seeking help after falling into debt as a result of overpaid tax credits has risen by 14%, Citizens Advice Bureau (CAB) has reported.
The consumer advice charity said in the 2013/2014 tax year it dealt with 29,366 cases of people in need of advice after they were overpaid child and working tax credits thanks to tax system errors.
Of those, around half were from worried taxpayers unable to make room for repayments to HM Revenue and Customs – a 19% increase on the previous tax year.
It comes as a Freedom of Information request by the Independent and campaign group False Economy found hundreds of thousands of people were being targeted by private debt collectors hired by the Government after struggling to pay back overpaid tax credits.
It said there were 4.7 million cases of overpaid tax credits, which amount to debts of £1.6bn.
The tax credit system has previously come under fire for administrative errors and delays, which leave some of Britain’s poorest families unsure about how much they are entitled to and how to make repayments after being overpaid.
The CAB said HMRC must “tread carefully” with its powers to reclaim money directly from people’s bank accounts as the economy recovers and welfare reforms are introduced.
Gillian Guy, CAB chief executive, said: “For thousands of families, Whitehall calculations are leading to household debt.
“Tax credits are there to make sure people get a decent standard of income, but the sharp rise in debts from overpaid tax credits suggests this policy is having the opposite effect.
“Seeking to improve the accuracy of tax credit payments is sensible but HMRC needs to tread carefully with its new powers to reclaim money directly from people’s bank accounts.
“HMRC has a poor track record in managing people’s data and dealing with overpayments.
“The safeguards put in place look sensible on paper but with such huge pressure on household budgets, it does not take much to push families into financial trouble and mistakes by HMRC will be harmful.
“As the economy recovers and welfare reforms are phased in, ministers and Government agencies must ensure people trying to make ends meet are supported through the upheaval.”
Working and child tax credits help top up the income of low-paid families. But tax credit debts arise when HMRC over-estimate how much financial support a person or family is entitled to and make overpayments.
The Independent’s investigation found HMRC made 215,144 referrals to debt collection agencies in 2013-14 to “secure direct recovery of overpaid personal tax credits”.
An HMRC spokesman told the newspaper that the use of debt collection agencies was an “effective part of our normal debt collection operations”.
He said: “Over and underpayments have always been a consequence of the tax credits system as HMRC calculates awards based on the current information it holds.
“Many overpayments result from people failing to tell us about a change of circumstances as soon as possible, so customers should tell us of any changes straight away.”