HMRC making progress on tackling tax debt

HM Revenue and Customs (HMRC) has had success in reducing tax debt as a proportion of tax receipts for three consecutive years, while managing significantly more new debts since the pandemic, according to a new report by the National Audit Office (NAO).

Taxpayers owed a total of £43.8 billion in tax debts at the end of 2025-26, 4.7% of tax receipts. This is down from 5.6% in 2022-23, though it remains far higher than before the pandemic.

HMRC achieved this while dealing with £103.6 billion of new tax debt in 2025-26, around twice the annual average in the five years before the pandemic. Cost of living pressures caused by the pandemic and Russia’s invasion of Ukraine have increased new tax debts and made it harder for some taxpayers to pay, whilst HMRC is also facing an increasing challenge from debtors who do not engage.

Nearly half of new debts are resolved within a month, which suggests that taxpayers forgetting to pay their tax bill or having short-term cash-flow problems are likely causes. HMRC considers many new debts preventable, but dealing with them still places significant pressure on its staff.

About half of the remaining debt balance is now older than a year, making it harder and less likely to be recovered, with HMRC estimating that 46% of the tax debt owed at the end of 2025–26 may not be collected.

Debt that was more than a year old and not covered by a payment plan increased from £5.3 billion before the pandemic to £18.6 billion at the end of 2025-26.

Since 2021, HMRC has introduced new measures to manage tax debt, including recruiting more staff, increasing its use of private sector debt collection agencies and using data to tailor its approach to different debtors. HMRC estimates that this generated £10.7 billion in additional revenue by the end of 2025-26, against spending of £368 million.

HMRC has consulted on introducing direct debits to help eliminate payment errors and expanding the scope of its powers to directly recover debt from taxpayers’ bank accounts for smaller debts, with outcomes expected to be announced in the upcoming Autumn Budget. It has other improvements in train to tackle some of the inefficiencies in its work, including introducing a new IT system, but needs to do more to manage the key delivery risks.

HMRC expects to reduce tax debt to between 2.9% and 4.2% of receipts by 202930, but these forecasts are highly sensitive to economic shocks and the flow of new debt. The NAO now recommends that HMRC brings together and updates the lessons it has learned from the pandemic and subsequent economic shocks, so it is better prepared to manage tax debt during a future crisis.

The report says that HMRC now needs to go further in tackling the inefficiencies in its processes and systems and improving the productivity of its existing workforce. Further recruitment would deliver increasingly diminishing returns, as staff increasingly deal with tackling lower-value and harder-to-reach debts.

The watchdog also recommends that HMRC make payment plans more automated and easier to manage digitally, and use better evidence to identify which interventions work best for different debtors and in different circumstances. This could reduce demand on staff and allow them to concentrate on older and harder-to-collect debts, as well as taxpayers who do not engage with HMRC.

Gareth Davies, head of the NAO, said “HMRC has made good progress on tax debt in the challenging circumstances of recent years, but faces an increasing problem of old debt which is harder to collect. 

“HMRC should now focus on preventing avoidable debt and acting quickly when debts arise. It has some promising improvements in train but needs to continue its efforts to get more productivity out of its staff and systems.”