Working for Families debt has increased by more than $42 million in nine months, new data shows, and people are being warned it could get worse as unemployment rises.

Inland Revenue says total Working for Families debt reached $280.025 million at the end of May this year.

Last August, it was $238m. In July 2020, 44,000 people owed $162m.

University of Auckland associate professor Susan St John says the level of debt has doubled since 2018.

She says there are probably two "opposite" reasons why people end up with debt.

"The first is that the family earns more income than they anticipate, they're often self-employed and getting weekly Working for Families - then they find when they get their tax return that Inland Revenue is coming after them for overpayment, and that can be quite a lot of money."

The amount that households can claim is tied to their income, so if they earn more than expected, they have to pay it back.

Because the threshold at which Working for Families payments started to clawed back was fixed at $42,700, more people were being pushed above that as their salaries rose, she says, even if their pay was only keeping pace with inflation.

Over that level, credits abated at a rate of 27c in the dollar.

Some households opted for annual payments to avoid overpayment.

St John said some people might also get a Working for Families bill because they had lost their jobs and ended up on a benefit.

The in-work tax credit, which was rising by $25 a week to just under $100, was reliant on the recipient having paid work.

"They can only have no paid work for two weeks. People don't realise and it might be a long time further down the track, they've been unemployed, out of work, trying to reorganise their lives and have been receiving Working for Families just the same as before because of course the needs of their children don't change," St John says.

"Then they discover they shouldn't have been receiving [the in-work credit] and they get this bill. I imagine we are going to see more and more of that."

She says the increase in the in-work tax credit is likely to mean bigger bills to repay.

People could also end up overpaid if their relationship broke up.

"It's based on joint income when families are living together, but how do they know all this information to be able to adjust it in real time?"

Working for Families needs to be reset, she says, with thought given to what it is supposed to be about.

"Its primary purpose is to protect children and be that fiscal cushion when families go into hard times.

"If you put the needs of the children at the centre of the policy, not paid work, the whole reason for having the in-work tax credit disappears."

The system needs simplification down to a single tax credit, she says.

In its most recent annual report, Inland Revenue says 67 per cent of Working for Families customers are paid within 20 per cent of what they should have been.

It says at that point, 46 per cent of debt is more than two years old.

-RNZ.