Tax gap 2026

This week the assumed Prime Minister in waiting – Andy Burnham – set out some of his vision for the country. It was framed around a familiar question; how does Britain rebuild after years of economic insecurity, an enduring affordability crisis, trust in politics on the floor and people’s quality of life declining. The answer, Burnham says, lies in devolution. Taking centralised power away from Westminster and instead giving greater agency to regions right across the country.

Burnham’s right that more devolution is needed, but his vision was light on detail about how life can be made better for people across the UK. And we know this plan needs serious funding behind it for people from the South West to the North East to feel and see change around them. It can’t be an exercise in giving with one hand to take with the other. Which is why taxation needs to be a central piece of the puzzle. Whether that’s new or existing taxes used as tools to redistribute wealth, or getting a handle on the growing Tax Gap. Because last week we found out that the UK is losing out the entire schools budget to unpaid tax.

£60bn of unpaid tax

So what is the Tax Gap? It’s the difference between the tax that the government should be paid, and the tax it actually collects. Each year the tax authority – HMRC – publishes statistical figures that give the public an estimate of what the Tax Gap is. Last week they showed that tax going unpaid has jumped up by billions, to £59.2 billion which is the equivalent of around 6.4% of all taxes owed.

This is a staggering £6 billion more than the previous year, and the total going unpaid is more than enough to expand the provision of free school meals so kids are well fed, increase support to make childcare truly affordable, and kickstart significant social housing construction to get people in secure, inexpensive homes.

Clearly, this is a massive chunk of money that’s not going toward public services, strengthening the economy and making life better for people around the country. And worse yet, the amount of taxes being dodged could be far higher. HMRC is still refusing to disclose information it holds about the ‘offshore Tax Gap’, which is the amount of tax going uncollected from UK taxpayers’ overseas income and gains, including from assets in tax havens. We know HMRC has this information, but won’t release the figures publicly.

One step forward, two steps back

Up until a few years ago, successive governments had been making some good progress on the Tax Gap. In 2005 about 7.5% was going unpaid and by 2018, this had fallen to 5%. But since then, progress has stalled and the gap has crept back up to 6.4%.

While this might sound like a small percentage change, the numbers behind it are staggering. A 1% reduction in last year’s tax gap would have net the government an extra £9bn in revenue. This is money that could have been spent on capping the cost or making bus journeys free. Or it could have paid to help install a full solar and battery system on more than 600,000 UK homes, bringing down energy bills and putting money back in people’s pockets.

Seeing so clearly what this money could have been spent on – to improve lives – draws into sharp focus the consequences of tax going unpaid.

And the latest report from the government also revised the estimates HMRC had made for previous years. This showed that the cumulative unpaid taxes – from 2005 to 2024 had risen from just over £650bn to £681bn.

Part of this increase might be reflecting better detection of tax dodging. That’s from improved data and modelling which can help the tax authority identify where non-compliance was taking place, that they might otherwise not have seen. This is precisely why investing in HMRC matters. They need the resources and the right staff to be effective, so everyone pays their fair share.

Making sense of the numbers

What’s important to remember, is that most people pay the taxes they owe. In fact, if you reverse the tax gap, over 93% of what is due gets paid. The vast majority of us do the right thing and pay into the system. The challenge is getting to the heart of the missing money and then effectively collecting it.

By far the biggest chunk of missing money is small businesses who are responsible for around 62% of the total Tax Gap. While this will generate headlines about dodgy shops (which are a real problem), what it doesn’t tell you is that HMRC estimates about 45% of the small business Tax Gap is a result of carelessness, confusion or error. So rather than all these small businesses trying to stash their cash, a huge amount is because it’s not as easy as it should be to pay taxes owed, and even accountants are making mistakes.

Another 12% of the gap is from the biggest businesses who have no excuses, as they use the most expensive accountants and tax advisors to complete their filings. They would represent a much bigger chunk of the tax gap were it not for some great work by HMRC’s specialist big‑business unit which clawed back £16bn in dodged taxes. That should be celebrated, without this their contribution to the tax gap would have been almost three times as big.

Going after super-rich non-compliers is a win-win. Every £1 spent on big business tax compliance returned up to £95.

And just chasing these companies paid for all further education, apprenticeships, and T-level programmes aimed at improving vocational skills, without asking any of us to pay more. And this corporation tax gap doesn’t even account for the profits that are legally booked overseas, but could be taxed here if tax rules on public country by country reporting were implemented.

The picture is much the same with the very wealthiest in Britain – the top 2% in the country – who dodged more in tax than the other 98%. It’s estimated that those in the top 2% avoided paying about £3.6bn, but the figure is likely much higher. We know that when HMRC investigates the tax affairs of the wealthiest, they regularly recoup huge amounts of money. The National Audit Office found that HMRC recovered over £5bn in tax revenue that would have gone unpaid from wealthy individuals in the tax year ending 2024.

A key test for the government

Clearly, Britain needs a better tax system that makes it easier for regular people and businesses to pay the correct amount, and much harder for the very wealthiest and corporations to get away without paying their fair share. The good news is that the evidence is there. Investing in HMRC pays back enormous dividends. 

And this can be accompanied by changing the way extreme wealth in this country is taxed, and redistributed fairly around the country, so people’s lives can be improved everywhere. If Burnham is serious about devolution, he needs to commit the funding needed for it to be effective. Which is why he cannot ignore tax, particularly the growing problem of the Tax Gap.