Millions of people fail to claim their rightful tax credits and benefits because they are put off by the complexity of the system. Times Money looks at some of the most common examples and why people are reluctant to claim.

Families and low-income households

UK taxpayers miss out on billions of pounds of additional income from tax credits. The credits aim to boost the income of certain households. Child tax credits are available if you have at least one child living with you, while the working tax credit is available if you earn low wages, even if you have no children.

Citizens Advice says that three out of four low-paid workers without children fail to claim their working tax credits, while 8 per cent of entitled families do not claim their child tax credits.

The tax credit system has been dogged by criticism and controversy since its inception in 2003. The main problem has been the overpayment of credits, which Revenue & Customs can demand to be paid back. This has caused great problems for low-income households, many of which had already spent the money in good faith.

Although the Revenue says that overpayments have halved since the 2003-04 tax year, there was still £1 billion overpaid in 2006-07. Many people, who may not have realised they were overpaid, could now have their credit payments stopped and face demands to return the Revenue's overpayments.

A survey by Citizens Advice last year found that eight in ten respondents had been overpaid and seven in ten reported that the recovery of overpayments caused their family financial difficulties. More than a quarter of respondents were told that they owed more than £2,500.

David Harker, of Citizens Advice, says: “Tax credits can play an essential part in family finances, but only if they provide a reliable source of income. For too many people the uncertainty, anxiety and hardship that claiming tax credits can cause outweighs the benefits of extra money.”

Recipients of tax credits must notify the Revenue immediately of any changes in circumstance that could affect payments, particularly changes to your or your partner's working hours or salary and to childcare arrangements. You must also renew your claim by July 31 every year.

Problems with overpayments or underpayments often arise because the Revenue has received, or mistakenly recorded, the wrong information. Other reasons are that the forms have not been renewed on time or the Revenue has not acted on information. The forms are lengthy and complex - the explanatory notes alone are 59 pages - and this inevitably leads to mistakes.

Anita Monteith, of the Institute of Chartered Accountants in England and Wales, says: “A big problem with tax credits is a lack of financial literacy among those who are supposed to claim them. For many, the prospect of filling in complicated forms and being in regular contact with the Revenue is too daunting, especially if personal circumstances change often. Also some communities may feel that it goes against their beliefs or culture to claim money.”

Robin Williams, of the Low Incomes Tax Reform Group, adds: “The Revenue still has a lot of work to do to improve the tax credits system. It needs more staff, better training and more resources. There is a big backlog of complaints, appeals and requests for explanations, as well as continuing reports of the helpline giving out wrong information. The Revenue often gets caught out by the complexity of its own system.”

Pensioners

If you are 60 or over and on a low income, you may be entitled to the pension credit. A third of those eligible do not claim, meaning that up to 1.7 million older people are missing out on an average of £26 a week, according to Age Concern. There are two parts of the pension credit and you may be eligible to receive one or both. The guarantee credit element tops up your weekly income to £124.05, while the savings element provides up to an additional £19.71 a week if you have little savings.

Even more pensioners - 2.2 million - miss out on council tax benefit, which reduces the average bill by £624 a year. You qualify if you have no more than £16,000 in savings, unless you receive guarantee credit, in which case there is no savings limit and your council tax could be fully covered by the benefit.

About 310,000 older people could also claim housing benefit to reduce their rent by an average of £38 a week. Other benefits that many older people fail to claim include attendance allowance, disability living allowance and carers allowance.

Gordon Lishman, of Age Concern, says: “Pensioners are losing out on benefits because they find the system difficult to understand, are embarrassed about claiming or do not realise that they are entitled to the extra cash. The Government should do much more to get benefit to those who need it, so that all pensioners can afford a decent quality of life.”

To obtain Age Concern's free factsheet on benefits, More Money in Your Pocket, call freephone 0800 009966, or go to ageconcern.org.uk.

Case study, £4,000 bill inspired lobby group

Sarah McCall co-formed the Tax Credit Casualties lobby group after being chased by Revenue & Customs for £4,000 that it had overpaid her and then demanded back.

The 38-year-old single parent, above, started claiming the working tax credit in 2003, but in February 2004 she increased her working hours. She says: “I called the Revenue straightaway to inform it of my change in circumstance, but it misrecorded what I told it. I ended up receiving too much in credit payments, and in 2005 I received a bill for nearly £4,000. I am still disputing the debt, even though the Revenue has threatened to take me to court.”

Ms McCall has taken her case to the Revenue's dispute resolution service and it is currently with the adjudicator.

Tax Credit Casualties was formed in 2005 and campaigns for an amnesty for overpayment debts. The group's website can be found at www.taxcc.org.