The Department for Work and Pensions overpaid £9.9 billion of benefits in the 2025 to 2026 financial year, with Universal Credit accounting for £6.72 billion of that total. A Universal Credit overpayment, tax refund treatment and an employer’s payroll reporting are more closely linked than many claimants realise.
The main findings from the department’s annual fraud and error release, published on 14 May 2026:
- Benefit expenditure reached £308.6 billion, paid to around 24.3 million people, of which 3.2% was overpaid.
- Universal Credit overpayments ran at 8.5% of UC spending, or £6.72 billion, the largest single share by value of any benefit.
- Pension Credit recorded the highest overpayment rate at 10.0%, topping that measure for the second year running.
- Official error, which covers HMRC and local authority mistakes as well as the department’s own, accounted for 0.4% of expenditure, including £610 million on Universal Credit.
- Around 3.3 million Universal Credit households, 46% of the caseload, had a deduction taken in February 2026, averaging £51 a month.
What the figures show
The cash total rose from £9.4 billion while the rate edged down from 3.3%. Benefit expenditure grew from £286.6 billion over the same period, which is why both can be true.
Andrew Western, Parliamentary Under-Secretary of State at DWP, told Parliament the department was on track to meet an OBR forecast of 2.8% by 2028/29. He described that as “the lowest rate since tax credits were first introduced in 2003”.
DWP statisticians were more cautious. On their own testing, neither headline rate shifted meaningfully between the two years, and the fall in the Universal Credit rate from 9.5% did not clear that bar either.
Why the tax system shapes a Universal Credit award
Under regulation 61 of the Universal Credit Regulations 2013, the earnings behind an award come from what employers report to HMRC under PAYE rules, as received by DWP during that assessment period.
Where nothing arrives in a period, the regulation directs that earnings from that employment be taken as nil.
An award can therefore rest on a figure bearing little relation to what was actually paid.
The department’s definition of official error reaches past its own staff, catching inaction, delay and mis-assessment by a local authority or by HMRC, so payroll problems sit inside it rather than outside.
The regulations do allow for this: where a reported figure looks materially wrong, or an employer is thought unlikely to report accurately or on time, the department may set that data aside.
Two paydays landing in one assessment period
A recurring problem arises when an employer moves a pay date, often around a bank holiday. Two salary payments then land in one assessment period, inflating assessed income and cutting that month’s award.
Regulations in force from 16 November 2020 gave the department a discretion to correct this. Where someone is paid on a regular monthly basis and two payments are reported together, it may treat one as belonging to a different period.
Two limits matter. The power is written around regular monthly pay, so four-weekly and weekly cycles fall outside it, and it is discretionary rather than automatic.
How a Universal Credit overpayment tax refund is treated
Two routes matter, and they lead to different answers.
A refund reaching someone through their employer’s payroll is counted as employed earnings under regulation 61, whichever tax year it relates to. The Upper Tribunal confirmed this in SK and DK v Secretary of State for Work and Pensions, decided in January 2023.
Where the real time information rule applies, the judge held, that is the end of the matter. Such a payment is in substance deferred pay being released.
Regulation 55(4A) governs the other route, a repayment received directly from HMRC. There the tax year does matter. A repayment for a year in which the person was in paid work counts as employed earnings.
It is then tapered at 55p in the pound, on earnings above any work allowance or on all earnings where none applies. Refunds connected to a trade, profession or vocation count instead as self-employed receipts under regulation 57(4).
Two qualifications are easy to miss. “In paid work” is broader than it sounds, as the same decision held that a subsisting employment contract counts even where the person is on unpaid sick leave and doing no work.
And a direct HMRC refund will ordinarily relate to an earlier year, because HMRC does not generally make direct in-year repayments.
Where a repayment does relate to a year with no paid work, regulation 55(4A) does not pull it in as earnings. What happens instead is less settled, and worth putting to a welfare rights adviser rather than assuming.
Reporting a refund through the online journal, with the tax year it relates to and how it arrived, gives the department what it needs.
Recoverable whatever the cause
Section 71ZB of the Social Security Administration Act 1992, inserted by the Welfare Reform Act 2012, made any Universal Credit paid in excess of entitlement recoverable. That holds whether the cause was fraud, claimant error or a mistake by officials.
This is a real difference from Housing Benefit, where an official-error overpayment may not be recoverable if the claimant could not reasonably have been expected to realise it. Guidance written about Housing Benefit does not carry across.
During the passage of the Public Authorities (Fraud, Error and Recovery) Bill, members heard that close to 700,000 new Universal Credit official-error debts entered DWP’s debt management system in 2023-24.
An amendment to limit recovery of those debts was tabled that March as a probing measure, but the minister resisted it and it was withdrawn, leaving the position unchanged.
Recovery remains discretionary, and the department has power to waive it, though that is a case a claimant has to make. Deductions from an ongoing award are capped under the Fair Repayment Rate, introduced on 30 April 2025, which cut the maximum from 25% to 15% of the standard allowance. Only last-resort deductions can exceed it.
What the new bank data powers do
That Act became law on 2 December 2025, and the department puts its expected benefit at £2.1 billion over the period to 2030/31.
Its eligibility verification measure lets DWP issue notices to banks, which must then check accounts receiving certain benefits against set indicators. For Universal Credit that means principally the £16,000 capital limit.
Banks return account identifiers and a flag, not transaction histories or spending data, and a flag prompts review by a caseworker rather than an automatic change to an award. It covers Universal Credit, Pension Credit and Employment and Support Allowance, but not the State Pension.
Money that may be flowing the other way
Underpayments ran at 0.4% of expenditure, or £1.2 billion, unchanged as a rate. DWP separately reported unfulfilled eligibility, what claimants could have received had it held their correct circumstances, at 1.2% or £3.7 billion.
A change that should have raised an award but was never actioned may therefore be worth arrears rather than a debt.
What to do if an overpayment letter arrives
If a letter lands, the useful move is to treat the figure as a claim to be checked rather than a settled fact.
Steps to take
- Ask for a written statement of reasons, within one month of the decision. If DWP agrees to provide one your deadline to challenge is extended, but it can refuse where it says you already had one, so request the reconsideration before the original deadline regardless.
- Check the assessment periods against your payslips. Look for a month carrying two salary payments, a month with no earnings figure at all, or a refund counted against the wrong year.
- Request a mandatory reconsideration, normally within one month of the decision. If it stands, you can appeal to an independent tribunal, usually within a month of the reconsideration notice.
- Deal with the deductions separately. DWP policy is not to suspend Universal Credit deductions during a reconsideration or appeal, so ask Debt Management to reduce or pause recovery if it is causing hardship.
- Keep records, including payslips, P60s, journal entries and the dates and names from any calls.
Free help is available from Citizens Advice, MoneyHelper, StepChange, National Debtline and Advicenow, and from LITRG or TaxAid on the tax side. The Universal Credit helpline is 0800 328 5644 and DWP Debt Management is on 0800 916 0647. GOV.UK also sets out how money is taken off a Universal Credit payment.
Treat unexpected messages with caution, rather than assuming the channel settles it. DWP contact normally comes by post or through your journal.
HMRC does send genuine texts and emails, but it does not offer refunds in exchange for personal or financial details, and GOV.UK publishes a list of genuine HMRC contacts you can check against.
This is general information rather than personalised advice, and a welfare rights adviser can help with an individual case.
One tax-side check is worth making at the same time. If an award fell because of a refund or an odd payroll figure, the underlying PAYE position may have been wrong too. An emergency code, a BR code left on an old second job, or allowances never updated may mean tax was overpaid as well.
Checking your code keeps the figures feeding your award accurate, and may recover tax already paid. Tax Rebate Services sets out how a Universal Credit tax refund is treated and what needs reporting.
Written by:
Tax Rebate Services Editorial Team
Reviewed by:
Tony Shanks
,
qualified Taxation Technician (ATT)
Last updated:
This article provides general information and is correct as at the date shown. It isn't personalised tax advice — for help with your own circumstances, speak to a qualified adviser or HMRC.
