Britain’s tax gap grows to £59.2 billion amid warnings over system complexity
Key Points
- UK tax gap rose to £59.2 billion in 2024-25
- HMRC collected 93.6% of tax due; gap widened to 6.4%
- Corporation tax gap stands at 18.1%, the highest of any area
- Small businesses account for 62% of the total gap
- Frozen thresholds pulling more first-time filers into Self Assessment
Britain’s tax gap rose to £59.2 billion in 2024-25, according to provisional figures from HMRC, reversing several years of gradual improvement in compliance.
The data show HMRC collected 93.6% of all tax due across the year, leaving a shortfall of 6.4%. The gap had narrowed steadily over the preceding period, which makes the latest increase a notable change in direction.
Because the overall tax base continues to grow, even a small rise in the percentage gap translates into a substantial amount of lost revenue.
Rachael Griffin, Tax and Financial Planning Expert at Quilter, said the figures point to weakening compliance after years of progress. She noted that some long-term gains remain intact, particularly across VAT and personal taxes, but warned that pressure is starting to build elsewhere in the system.
Corporation tax and small businesses drive the shortfall
The gap for income tax, National Insurance and capital gains tax edged up to 4.0% over the year.
Corporation tax remains the standout challenge at 18.1%, and together these areas now account for around 35% of the total tax gap. Griffin said this underlines where the system is under the greatest strain.
Smaller businesses make up 62% of the overall gap, a concentration Griffin attributed to the growing complexity of the system for those without dedicated tax expertise.
As reporting requirements expand, she said, the risk of mistakes rises, meaning much of the gap likely stems from error and misunderstanding rather than deliberate non-compliance.
Frozen thresholds pull more into Self Assessment
Changes to allowances and the freezing of thresholds continue to draw more individuals into the tax system, according to Griffin.
Lower dividend and capital gains allowances in particular mean more people now file Self Assessment returns for the first time, often with limited understanding of the rules.
As more taxpayers move beyond PAYE into more complex reporting, she said, the risk of accidental non-compliance grows.
Leadership change raises questions over tax approach
Keir Starmer’s resignation as Prime Minister leaves a change in leadership on the horizon, which Griffin said could bring a different approach to taxation should a new Chancellor also take office. The next Budget remains some months away.
Griffin said the data carries an important message for policymakers regardless of the timing.
Closing even a fraction of the £59.2 billion gap could support the public finances without the need for further headline tax rises, she argued, adding that improving how the system works in practice, particularly for small businesses and those newly entering Self Assessment, may prove as important as any change to tax rates.
She said simplifying a tax system that continues to grow more complex should rank high on the agenda.
