Britain says tax gap hit £59.2 billion, small businesses blamed

Britain's tax office said underpaid taxes reached £59.2 billion in 2024/25, equal to 6.4% of the £924.4 billion in theoretical liabilities. HM Revenue and Customs said the largest share came from small businesses, which accounted for 62% of the gap, while the shortfall remained heavily concentrated in corporation tax and in income tax, national insurance contributions and capital gains tax.

HMRC collected £865.2 billion in the year, and the tax gap has narrowed from 7.5% in 2005/06 to 6.4% now. VAT non-compliance has fallen to 6.6% from 14.1%, but the corporation tax gap was still 18.1% in 2024/25, compared with 4.0% for income tax, national insurance contributions and capital gains tax. By component, corporation tax and income tax, national insurance contributions and capital gains tax each made up 35% of the total gap, with VAT accounting for 20%.

The government wants to raise another £10 billion a year by 2029/30 through measures aimed at closing the gap. The National Audit Office said HMRC's compliance activity yielded £48.0 billion in 2024/25, up 14.9% from the previous year, but tax debt still stood at £42.8 billion as of 31 March 2025. Britain also carried a budget deficit of £128 billion, or 4.2% of GDP, in the last financial year, leaving Rachel Reeves with just £24 billion of headroom if she wants to balance day-to-day spending with tax revenue by 2029/30.

Department for Work and Pensions figures for the year to March 2025 showed benefit overpayments of 3.3%, or £9.5 billion, and underpayments of 0.4%, or £1.2 billion, across payments to around 24.3 million people. The department said 81% of those overpayments were linked to suspected claimant fraud, while the rest came from claimant error and mistakes by officials. Overall welfare overpayments were estimated at £10.3 billion, including £7.4 billion in universal credit, and fraud and error in the welfare system, including pensions, fell to 3.2% in 2025/26 from 4.3% in 2021/22.