Britain tax underpayments reach 6.4% as small businesses drive shortfall

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UK tax underpayment shortfall

Highlights

Britain's tax gap reached 59.2 billion pounds or 6.4% of tax due in 2024/25, with limited progress on reduction targets.
A 128 billion pound budget deficit pressured fiscal policy, while Finance Minister Rachel Reeves has only 24 billion pounds of leeway to balance spending by 2029/30.
Welfare system overpayments are projected at 10.3 billion pounds for 2025/26, with 7.4 billion pounds from universal credit and most arising from suspected fraud.

Tax gap target and official estimates

As reported by Reuters and Britain's tax office, taxpayers paid 59.2 billion pounds less than they should have in the 2024/25 financial year, equal to 6.4% of total tax due. The government is aiming to reduce that shortfall by 10 billion pounds by 2029/30, although progress has been limited, with the underpayment rate falling by only 1 percentage point over the past 20 years.

The tax office estimates that 35% of underpayments are due to carelessness or negligence by taxpayers, while 16% stem from error and 12% from tax evasion. Corporation tax and value-added tax are the taxes most often left unpaid, it adds.

Budget pressure and welfare overpayment trends

These figures come as Britain is managing a budget deficit of 128 billion pounds, or 4.2% of gross domestic product, in the last financial year. Finance minister Rachel Reeves has only 24 billion pounds of leeway to meet a goal of balancing day-to-day spending with tax revenue by 2029/30.

Separate figures from the Office for Budget Responsibility show fraud and error in the welfare system, including pensions, falls to 3.2% in 2025/26 from a peak of 4.3% in 2021/22 during the COVID-19 pandemic. Overall overpayments are estimated at 10.3 billion pounds in 2025/26, including 7.4 billion pounds for universal credit.

More than a quarter of new universal credit claims made during the COVID-19 pandemic were wrong, but the fraud and error rate for the benefit has now been reduced to just under 10%, back to its pre-COVID-19 level, the OBR says. Britain's Department for Work and Pensions says 81% of universal credit overpayments last year are due to suspected fraud by claimants, while 10% come from inadvertent claimant errors and 9% from official mistakes.

In our earlier article on Labour’s leadership transition after Keir Starmer’s resignation, we explained how Andy Burnham’s rise as the likely next prime minister refocused investors on fiscal credibility. We noted that gilt yields and sterling were still reflecting lingering sensitivity after the 2022 gilt turmoil, meaning Burnham would be judged on adherence to budget rules and the ability to reassure markets.

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