What is behind HMRC’s £43.8 Billion tax debt challenge?

The UK’s tax authority is owed £43.8 billion by 8.2 million taxpayers, with older debts and difficulties reaching some debtors posing a major challenge despite recent progress in collections, a new report by the National Audit Office (NAO) has found.

The report, published on October 23, 2026, examines HM Revenue and Customs’ (HMRC) efforts to reduce outstanding tax debts while preventing new arrears from accumulating.

HMRC collected £938.8 billion in tax during the 2025-26 financial year, but outstanding tax debt stood at 4.7% of total receipts at the end of the period. The NAO said the authority had made progress in reducing the proportion of tax receipts tied up in unpaid bills, even as the cost-of-living crisis and lingering effects of the pandemic affected taxpayers’ ability to pay.

The findings raise questions about how effectively HMRC can recover unpaid taxes, improve its collection systems and prevent more individuals and businesses from falling behind on their obligations.

UK Tax Debt Falls to 4.7% of HMRC Receipts

HMRC’s outstanding tax debt has declined as a proportion of tax receipts over the past three financial years.

According to the NAO, tax debt fell from 5.6% of receipts in 2022-23 to 4.7% in 2025-26. The watchdog credited HMRC’s additional staffing and improved use of information about taxpayers’ financial circumstances for helping to drive the reduction.

However, the outstanding balance remains substantial. At the end of 2025-26, 8.2 million taxpayers owed the authority a combined £43.8 billion.

The pandemic created significant pressure on taxpayers’ finances, followed by the cost-of-living crisis, which affected the ability of some individuals and businesses to settle their tax liabilities on time.

HMRC records unpaid amounts as tax debt when taxpayers fail to make scheduled payments towards their liabilities. Its debt management directorate is responsible for pursuing and collecting those outstanding amounts.

HMRC Receives £1.3 Billion to Improve Tax Debt Collection

Since the NAO’s previous report on tax debt management in 2021, HMRC has received an additional £1.3 billion to support its debt collection work between 2021-22 and 2030-31.

The funding has supported several measures designed to increase collections and improve the authority’s understanding of taxpayers who owe money.

These include recruiting additional debt collection staff, increasing the use of private-sector debt collection agencies, purchasing data from credit reference agencies and introducing a new case management system.

HMRC also uses credit reference information to assess debtors’ ability and likelihood to pay. This helps the authority direct its collection efforts towards different groups based on their circumstances.

The NAO estimated that measures introduced since 2021 had generated an additional £10.7 billion in revenue.

Staffing has been a significant part of the strategy. HMRC increased its debt management workforce by 20% between 2023-24 and 2025-26, reaching approximately 5,600 full-time equivalent staff in the latest financial year.

Staffing costs totalled £237 million in 2025-26.

HMRC Collects £350 for Every £1 Spent on Staff

The NAO found that HMRC’s debt collection operation delivers a substantial financial return relative to its staffing costs.

For every £1 HMRC spent on debt management staff in 2025-26, it collected £350 in debts.

However, the watchdog warned that adding more staff was producing diminishing returns. As the authority collects more straightforward debts, its remaining caseload increasingly includes lower-value debts and taxpayers who are harder to reach.

This means HMRC may struggle to maintain the same level of productivity simply by expanding its workforce.

The NAO said the authority would need to improve the productivity of its existing staff and make better use of technology and payment systems to sustain progress.

A new case management system is among the improvements being developed. HMRC has also consulted on introducing direct debits to help reduce payment errors.

The authority is also expected to improve the use of self-service payment plans, allowing more taxpayers to manage their repayments without requiring direct intervention from debt management staff.

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HMRC May Miss Its 2.5% Tax Debt Target Until After 2029-30

HMRC aims to reduce outstanding tax debt as a proportion of tax receipts each year. Its projections suggest the ratio could fall to between 2.9% and 4.2% by 2029-30.

However, the authority does not expect to reach the former Exchequer Secretary to the Treasury’s target of 2.5% until after that financial year.

The target was set in July 2025, but no deadline was established for achieving it.

The gap between HMRC’s projections and the 2.5% goal highlights the challenge of reducing the outstanding balance while dealing with existing debts and preventing new ones from accumulating.

The NAO said HMRC had identified policy changes that could help prevent tax debt and improve its approach to taxpayers who do not engage with collection efforts.

Preventing new arrears is particularly important because relying solely on debt recovery can become more expensive as outstanding balances grow older and become harder to collect.

Why Older Tax Debts Are a Growing Challenge

The NAO’s report highlights the difficulty HMRC faces in recovering older debts and reaching taxpayers who do not respond to its efforts.

As debts age, collection can become more complicated, particularly when taxpayers’ financial circumstances have changed or their ability to repay has weakened.

HMRC has made progress in identifying debtors who are more likely to pay and adapting its approach using credit reference data. However, the NAO said the authority needs a better understanding of which interventions work best for different groups of taxpayers.

That information could help HMRC avoid spending resources on less effective collection methods and tailor its approach to the circumstances of individual debtors.

The authority will also need to make it easier for taxpayers to set up payment arrangements and settle liabilities before they become more difficult to recover.

What the Report Means for UK Taxpayers

The report does not announce a new tax, penalty or immediate change to the rules governing taxpayers who owe HMRC money. Instead, it assesses how effectively the authority is managing existing debts and what it needs to do to improve collections.

For taxpayers who have fallen behind on payments, the findings underline HMRC’s continued focus on recovering outstanding liabilities.

The report also points to a greater emphasis on preventing tax debt, improving payment arrangements and using financial information to determine the most appropriate collection approach.

For the government, reducing unpaid tax could help protect revenue available for public services. HMRC’s challenge is to recover outstanding amounts efficiently while addressing the circumstances that cause taxpayers to fall into arrears.

The NAO’s assessment suggests that progress has been made, but the authority still faces a substantial task in reaching its longer-term debt reduction ambitions.

Frequently Asked Questions

1. How much tax debt is owed to HMRC?

HMRC was owed £43.8 billion by 8.2 million taxpayers at the end of the 2025-26 financial year, according to the National Audit Office.

2. How many people owe money to HMRC?

The NAO report states that 8.2 million taxpayers had outstanding tax debts at the end of 2025-26. The figure refers to taxpayers, not necessarily individual people alone.

3. Has UK tax debt increased or decreased?

Tax debt fell as a proportion of HMRC’s tax receipts, declining from 5.6% in 2022-23 to 4.7% in 2025-26. The total outstanding debt at the end of 2025-26 was £43.8 billion.

4. How much did HMRC collect in 2025-26?

HMRC collected £938.8 billion in tax during the 2025-26 financial year.

5. How much funding has HMRC received to tackle tax debt?

HMRC has received an additional £1.3 billion to support its debt management work between 2021-22 and 2030-31.

6. How much does HMRC collect for every £1 spent on debt management staff?

The NAO reported that HMRC collected £350 in debts for every £1 spent on staff in 2025-26.

7. When will HMRC reduce tax debt to 2.5% of receipts?

HMRC does not expect to reach the 2.5% target until after 2029-30. Its current projection places the debt ratio between 2.9% and 4.2% by that financial year.

8. Why is HMRC struggling to collect older tax debts?

Older debts can be harder to recover, and some taxpayers are difficult to contact or have limited ability to pay. HMRC is using credit reference data and targeted collection methods to improve recovery.

9. Does the report introduce new tax penalties?

No. The report evaluates HMRC’s tax debt management performance and strategy. It does not announce new penalties or a new tax policy.

10. What is HMRC doing to reduce unpaid tax?

HMRC is recruiting staff, using credit reference data, working with private-sector debt collection agencies, developing a new case management system and exploring improvements to direct debits and self-service payment plans.