HMRC expects £12.9bn of tax debt to go uncollected, NAO says

HMRC expects £12.9bn of tax debt to go uncollected, three times the level recorded before the pandemic, according to a National Audit Office report published today. The watchdog said the amount of debt HMRC does not expect to recover rose from £4.2bn in 2019-20 to £12.9bn in 2025-26. Over the same period, the total owed to the tax authority more than doubled, from £19bn to £43.8bn.

Why debts are being written off

The NAO said £9.8bn of the £12.9bn, around three quarters, was made up of formal write-offs, which it linked to a rise in company closures and personal bankruptcies across the UK. A write-off is recorded when HMRC decides a debt is irrecoverable because there is no practical way of pursuing it further.

The NAO found that business insolvencies rose by 39 per cent between 2019-20 and 2025-26. Part of that rise reflects courts and HMRC working through a backlog of insolvencies and bankruptcies built up during the pandemic, when the tax office temporarily suspended its normal debt collection activity to give businesses breathing room. HMRC has the legal power to force a company into liquidation if it is persistently in tax arrears, and the number of winding-up petitions it secured through the courts rose by 185 per cent between 2022-23 and 2025-26, according to the report.

John Hood of accountancy firm Moore Kingston Smith said HMRC was understandably reluctant during and immediately after the pandemic to wind up struggling companies, but that the situation has changed over the past 18 months. He said HMRC has increased resources to enforce the debt and, where necessary, will remove companies that have no real prospect of paying.

Insolvencies and cost pressures

Annual company insolvencies rose from around 14,000 in 2021 to 25,000 in 2023 and stood at about 24,000 in 2025, a level that has been broadly flat since 2024. The construction sector recorded the highest absolute number of insolvencies of any industry in the 12 months to September, according to the latest Insolvency Service figures.

Advisers pointed to a combination of cost pressures on companies. Glen Flannery, a legal specialist at law firm CMS, said formal insolvencies remain at historically elevated levels, and that what we are seeing now is the cumulative effect of stubborn inflation, higher interest rates and increased employment costs landing at the same time.

Employer National Insurance contributions and the statutory minimum wage both rose after the autumn Budget in 2024. Insolvency specialists have previously cited higher operating costs, tighter commercial credit and weak consumer demand as the main sources of financial strain on companies.

Nimesh Shah of accountancy firm Blick Rothenberg said the UK tax burden is at its highest in modern peacetime, and that changes to tax structures, labor laws and the minimum wage increase have added a significant burden to businesses. He added that the great irony is that the Government increasing the tax burden has had the counterproductive effect of increasing HMRC’s own tax losses through higher default rates.

Scale of the debt and progress

• The NAO found that 8.2 million individual and corporate taxpayers were in debt to HMRC at the end of 2025-26, owing £43.8bn in total, roughly 4.7 per cent of annual tax receipts.
• Half of that debt was more than a year old.
• The report also credited HMRC with reducing tax debt from 5.6 per cent of tax receipts in 2022-23 to 4.7 per cent in 2025-26.
• It said measures introduced since 2021 had delivered an estimated £10.7bn in additional revenue.

NAO and HMRC response

Gareth Davies, the Comptroller and Auditor General who heads the NAO, said HMRC has made good progress on managing tax debt in challenging circumstances, but still faces a growing problem of old debt, which is harder to collect. He said HMRC should now focus on preventing avoidable debt in the first place and act more quickly when new debts arise. While HMRC has some promising improvements in train, he said, it needs to keep working to get more productivity out of its staff and digital systems.

An HMRC spokesman said the department welcomes the report, which recognizes the progress it is making in collecting the vast majority of tax debts while supporting vulnerable customers who genuinely owe tax. He said HMRC makes it easy to pay for those who can, supports those who need help, and takes firm action against those who deliberately choose not to engage.