Britons paid £59.2bn less tax than they should have during the 2024/25 financial year, equivalent to 6.4% of total tax liabilities, with small businesses accounting for the largest share of the shortfall, according to figures released by HM Revenue & Customs.
The UK government has set a target of reducing the tax gap by £10bn by 2029/30, although progress has historically been slow, with the overall rate of underpaid tax falling by just one percentage point over the past two decades.
The figures highlight the challenge facing Chancellor Rachel Reeves as the UK recorded a budget deficit of £128bn, equivalent to 4.2% of GDP, in the last financial year. Current forecasts suggest the government has around £24bn of fiscal headroom to meet its goal of balancing day-to-day spending with tax revenues by 2029/30.
Separate data from the Office for Budget Responsibility (OBR) showed that fraud and error across the welfare system, including pensions, fell to 3.2% in 2025/26 from a pandemic-era peak of 4.3% in 2021/22.
Total welfare overpayments were estimated at £10.3bn during 2025/26, including £7.4bn linked to Universal Credit, the benefit paid to unemployed people and those on low incomes.
The OBR said that while more than a quarter of new Universal Credit claims made during the COVID-19 pandemic were incorrect, the fraud and error rate has now fallen back to just under 10%, broadly in line with pre-pandemic levels.
According to the Department for Work and Pensions, 81% of Universal Credit overpayments last year were linked to suspected claimant fraud, while 10% resulted from claimant errors and 9% were caused by administrative mistakes.
HMRC estimated that 35% of the tax gap was caused by taxpayer carelessness or negligence, while 16% was attributed to mistakes and 12% to deliberate tax evasion.
