Britain is experiencing annual losses approaching $70 billion due to benefit overpayments and tax shortfalls, exacerbating pressure on public finances as spending demands increase. The Office for Budget Responsibility (OBR) reported that the government overspent on welfare by $10.3 billion in the most recent financial year, an increase from $9.4 billion the previous year. The majority of this sum is attributed to Universal Credit fraud, according to government figures.
Concurrently, data from HM Revenue and Customs (HMRC) revealed a $59.2 billion shortfall in collected taxes for the 2024-25 financial year. This figure represents an increase from $52.8 billion in the prior year, despite government initiatives aimed at reducing the "tax gap." These substantial financial losses compound the challenges facing stretched public finances.
The Treasury faced a deficit between government spending and tax revenue, requiring $128 billion in borrowing last year. Chancellor Rachel Reeves has limited fiscal flexibility, with only $24 billion in "headroom" against her targets for reducing debt and borrowing as of the March statement. These tens of billions lost to benefit errors and uncollected taxes also significantly outweigh recent disputes over defense spending, such as the $13.5 billion budget increase that led to Defence Secretary John Healey's resignation.
Of the $10.3 billion in benefit overpayments, the OBR figures indicate that $7.4 billion was related to Universal Credit. The Department for Work and Pensions stated that 81% of Universal Credit overpayments last year were due to suspected claimant fraud, with 10% resulting from inadvertent claimant errors and 9% from official errors.
HMRC attributed the tax gap primarily to underpayments by small businesses, which accounted for 62% of the gap, largely concerning unpaid corporation tax. Tax evasion constituted 12% of the tax gap, according to HMRC.
Rachael Griffin, a tax and financial planning expert at Quilter, suggested that recouping even a portion of the $59.2 billion tax gap could significantly aid public finances without necessitating further tax increases. She emphasized that improving system functionality, particularly for small businesses and individuals new to self-assessment, could be as crucial as adjusting tax rates. Griffin also highlighted the need to simplify the increasingly complex tax system.
HMRC chief executive John-Paul Marks acknowledged the evolving operational landscape, where traditional methods are becoming less effective against non-compliance. He outlined HMRC's goal to develop a modern tax system that simplifies compliance and deters wrongdoing, while enabling effective responses to non-compliance and criminal activity.