Breathing Space and benefit deductions

This article looks at the effect of a Breathing Space moratorium on deductions from benefits. It includes an ‘at a glance’ comparison table for different types of deduction.

This article was originally published on Jun 1, 2021 and has been updated on Mar 30, 2023.

The Breathing Space Debt Respite Scheme came into force on 4 May 2021. The main aim of the legislation is that a moratorium under the scheme will pause creditor enforcement action and freeze charges and interest to give clients time to get the full benefit of debt advice.

When advising your clients about the effect of Breathing Space it will be important to explain that not all debts are treated in the same way and not all collection action will stop.

Regulation 7 of The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 says that a moratorium under the scheme will pause creditor enforcement action. It sets out the effect of the moratorium on different types of debt collection including deductions from benefits. Regulation 7 applies in the same way to the Standard Breathing Space and the Mental Health Crisis Breathing Space.

There are also rules under social security law which limit the amounts and numbers of deductions that can be taken from the client’s benefit. If your client has more than one debt deducted from their benefit this may affect the impact that a Breathing Space moratorium will have.

You’ll need to check four things to advise your client about the effect that a Breathing Space will have on their benefit deductions:

1. What type of debt deduction do they have?
2. Is it a qualifying moratorium debt?
3. Are they claiming Universal Credit (UC) or a legacy benefit?
4. Do they have multiple deductions?

Type of debt deduction

A client may have one or more deductions taken at source from their benefit for debt repayment. Deductions can be taken for:

• Benefit overpayments
• Social fund loans
• UC budgeting advances
• UC advance payments on account of benefit
• Non UC advance payments on account of benefit
• Third party deductions for rent, council tax, gas,electricity water, credit union loans, fines and child maintenance

Your client’s benefit may also be reduced if they have been sanctioned. Benefit sanctions are not debt recovery and will not be affected by the Breathing Space scheme.

Is it a qualifying debt?

Clients will only be protected from enforcement of moratorium debts. A moratorium debt will be a qualifying debt that has been included in the Breathing Space application. Any debt owed by the client at the time of the application will be a qualifying debt unless it’s specifically excluded.

Excluded debts

Excluded debts can’t be included in the client’s Breathing Space and creditors owed these debts will be able to take recovery action or add fees and charges if the client doesn’t pay. Regulation 5 (4) of the Debt Respite Scheme (Breathing Space) Regulations 2020 sets out which debts are excluded from the scheme. Excluded debts that are relevant to this article include:

• UC advanced payments on account of benefit
• UC budgeting advances
• Social Fund loans
• Debts which the client has incurred because of their own fraud
• Court fines
• Child maintenance

Deductions for any of the above will not be affected by the moratorium. Existing deductions will continue and a new deduction for any of these debts could start during your client’s Breathing Space.

Deductions for qualifying debts

The effect of a moratorium will be different for different qualifying debts.

Benefit overpayments

As long as the benefit overpayment is not fraudulent it will be a qualifying debt. An overpayment is only classed as fraudulent if one of the following applies:

• the client has admitted fraud
• the client has been found guilty of fraud in court
• the client has accepted an administrative penalty in lieu of prosecution.

All non fraudulent overpayments that exist at the time of the application will be qualifying debts. Once an overpayment is included in the client’s Breathing Space, deductions from benefits must stop. This applies to deductions from UC as well as from legacy benefits.

Where the overpayment is being collected by the department for work and pensions (DWP) on behalf of another benefit provider such as a local authority housing benefit overpayment, the local authority will need to instruct the DWP to stop making the deduction once a moratorium starts. Any tax credit debts transferred by HMRC to the DWP count as DWP debt and so DWP won’t need to wait for instructions from HMRC for these.

We understand that there has been some conflicting advice to Local authorities on the effect of breathing space on deductions for housing benefit (HB) overpayments from ongoing HB. The DWP has said:

“Breathing Space is an HM Treasury policy and, furthermore, DWP do not own HB debts. So, it is for LAs to determine how Breathing Space legislation should be applied to LA debts. However, our interpretation is that HB debts that are recovered via ongoing HB payments is collection/enforcement action against the debtor”.

Non UC advance payments on account of benefit

Clients claiming benfits other than universal credit may have received an advance of benefit at the start of their claim. The Social security payments on account of benefits regulations 2013 allow for advance payments of :

• income support
• jobseeker’s allowance
• employment and support allowance
• state pension credit
• benefit under Parts 2 to 5 of the Contributions and Benefits Act (except attendance allowance and disability living allowance)

Non UC payments on account of benefit are qualifying debts and deductions for them must stop once they are included in breathing space.

Third party deductions

Deductions can be taken at source from the client’s benefit and paid to third parties such as water and energy companies where the client is in arrears at their current property. There is usually an arrangement for deductions to be made for ongoing usage as well, in order to safeguard the client’s supply.

Third party deductions from Legacy benefits and Pension Credit

Legacy benefits include:

• Income-based Jobseeker’s Allowance
• Income-related Employment and Support Allowance
• Income Support

For clients on legacy benefits or Pension Credit, arrears collection by third party deductions must stop once the client enters a Breathing Space moratorium. It will be up to the creditor to contact the DWP to tell them that their customer has entered a Breathing Space and request that the arrears deduction stops. Guidance from the DWP confirms this and includes a template for creditors to use. Once the moratorium ends the DWP will not automatically restart the third party deductions. The creditor will need to contact them again and ask for the arrears deductions to start again.

You can tell your client that although deductions for arrears should stop during a Breathing Space moratorium, payments towards ongoing usage will carry on. The Social Security (Claims and Payments) (Amendment) Regulations 2021 allow benefit deductions to continue for ongoing rent, utility and water bills, where a client includes arrears of these in a Breathing Space moratorium.

Third party deductions from Universal credit

Regulation 7(13)(d) of the Breathing Space Regulations specifically excludes third party deductions from UC. This means that currently third party deductions from UC will not be affected by the client entering a Breathing Space moratorium. These deductions will continue for clients claiming UC even where they are qualifying debts.

Does this include deductions for council tax arrears?

The wording of Regulation 7(13)(d) is that third party deductions from UC made under Regulation 60 of and Schedules 6 and 7 to the Universal Credit etc (Claims and Payments) Regulations 2013 will not be affected by a Breathing Space moratorium. Third party deductions (TPDs) under Regulation 60 and Schedule 6 include money taken from the client’s UC for rent, fuel, water, and credit union debt but not council tax arrears.

The DWP has issued guidance stating their position on third party deductions for council tax arrears. DWP’s lawyers have said that “whilst the power to request deductions comes from regulation 2(1) of the Council Tax (Deductions from Income Support) Regulations 1993, they are all still part of the system set out in Schedule 6 and the power to make deductions under that system is in regulation 60.” The guidance goes on to say:

‘Therefore, where deductions are being taken from the claimant’s universal credit, the local authority should not take any action to stop the deductions as universal credit TPDs are not currently included in the protections of Breathing Space.’

So although there’s an argument that third party deductions for council tax arrears should stop during a Breathing Space, that is not the DWP’s interpretation. Until this has been tested you will need to advise your client that all existing third party deductions taken from their UC, including for council tax arrears, will continue during their Breathing Space moratorium. If hardship is caused to your client by this interpretation they might want to consider challenging this.

The effect of multiple deductions

Clients with multiple debts may have more than one debt deduction from their benefit. The total amount of deductions from UC cannot normally be more than 25% of the client’s standard allowance and an order of priority operates for both UC and legacy benefits. Deductions for court fines are below deductions for benefit overpayments in the priority list. This means that a court fine — which is an excluded debt — could fill the gap created by the suspension of the benefit overpayment deduction or third party deductions from legacy benefits.

So although deductions for qualifying debts will stop during the moratorium, your client may not see an increase in the amount of benefit they receive if they also have an outstanding court fine. The advantage to the client will be that their fine, which is a priority debt and can’t be included in any debt solution, will be repaid more quickly. In addition, a recent policy change means that court fines will now be deducted at a more affordable level, a maximum of 5% of the standard personal allowance.

The DWP has said that the impact of the Breathing Space scheme will be ‘closely monitored’ and that it has set up a ‘marker’ in its benefits computer systems so it can track what is going on with Breathing Space claimants. If you have a client who feels that they are being treated unfairly because of the priority of deductions rules or any other aspect of the scheme as it relates to their benefit claim it will be helpful to report this through your usual social policy channels so that evidence can be provided to the DWP.

What about new deductions?

Regulation 7(6) prevents creditors from taking steps to take any enforcement action for a qualifying moratorium debt. This means that creditors will not be able to apply for a new deduction from benefit for a debt that has been included in the client’s Breathing Space. Regulation 7(11) clearly states that no new third party deductions can be taken from legacy benefits but is silent on new third party deductions from Universal Credit. However, the Insolvency Service Guidance for creditors makes it clear that no new deductions can be applied for:

“Once a Breathing Space has started, you or anybody acting on your behalf must not take any enforcement actions against the debtor or anyone who is jointly liable with them for a Breathing Space debt. Enforcement action is when you try to:

• collect or enforce a Breathing Space debt, including where this is done by any agent you’ve appointed. This includes the Department for Work and Pensions (DWP) where they are collecting a Breathing Space debt on your behalf through third party benefit deductions (not including Universal Credit or an ongoing liability payment). It does not include an existing attachment of earnings order made before the start of the Breathing Space, which may continue
• apply to DWP for a new third party deduction to be taken from an individual’s benefit payments”

As we have seen, the impact of a Breathing Space on a client’s benefit deductions will depend on what the deduction is for and which benefit they are claiming. This table gives you an at a glance comparison:

Impact of Breathing Space on benefit deductions

Lorraine Charlton works as a debt expert in the Expert Advice team at Citizens Advice.

The information in this article is correct as of the date of publication.

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