24th October 2026
National Audit Office warns that older debts are becoming harder to collect, despite improvements in HMRC’s performance
HM Revenue and Customs (HMRC) has reduced tax debt as a proportion of tax receipts for three consecutive years, despite dealing with significantly more new debt than before the pandemic. However, around half of the outstanding balance is now more than a year old, making it harder and less likely to be recovered.
Measures introduced since 2021, including more staff, greater use of private debt collection agencies and the use of data to tailor its approach to different debtors, have generated an estimated £10.7 billion in additional revenue.
These are among the findings of a new report from the National Audit Office (NAO), published on 23 October 2026. While the report recognises progress, it also highlights the scale of the challenge facing HMRC as it attempts to recover unpaid taxes and prevent further debts from accumulating.
The scale of the outstanding debt
At the end of the 2025-26 financial year, taxpayers owed HMRC £43.8 billion. This represented 4.7% of the tax collected during the year, an improvement on the 5.6% recorded in 2022-23.
However, the comparison with the period before the pandemic remains striking. Tax debt then averaged around £15 billion, equivalent to 2.5% of receipts.
HMRC collected £938.8 billion in tax during 2025-26, while dealing with £103.6 billion in new tax debt. That annual flow of new debt was approximately twice the average recorded during the five years before the pandemic.
The figures illustrate the pressures created by the pandemic, the subsequent cost-of-living crisis and the wider economic shocks that have affected households and businesses. When money is tight, some taxpayers struggle to meet their obligations on time, while businesses can find themselves short of the cash needed to pay tax bills.
Not all unpaid tax necessarily represents an inability to pay. Some taxpayers simply miss a payment or experience a temporary cash-flow problem. HMRC estimates that around 45% of new debts are resolved within a month and 90% within a year.
The difficulty is what happens to the debts that remain.
Old debts are becoming a serious problem
The NAO highlights the growing age of HMRC's outstanding tax debt. Around half of the remaining balance has been on the department's books for more than a year.
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.
The longer a debt remains unpaid, the more difficult recovery can become. A business may have closed, an individual may have become insolvent, or a taxpayer may no longer have sufficient assets or income to settle the bill.
HMRC estimates that 46% of the tax debt outstanding at the end of 2025-26 may never be collected.
That is a substantial potential loss of revenue. It also explains why the department cannot simply measure success by the amount of money it collects in any one year. Preventing debts from arising in the first place, and acting quickly when payments are missed, may be more effective than trying to recover money years later.
More staff and better use of information
HMRC has responded by increasing its investment in debt collection. It received £1.3 billion in additional funding to be spent between 2021-22 and 2030-31, covering measures including recruitment, technology and improved methods of identifying and contacting debtors.
Its debt management workforce increased by 20% between 2023-24 and 2025-26. HMRC also uses credit reference data to help assess a debtor's circumstances and tailor its approach.
For example, someone who can afford to pay but has overlooked a bill may need a reminder and a straightforward way to settle it. Someone experiencing genuine financial difficulties may need a payment arrangement. A debtor who repeatedly fails to engage may require a different response.
HMRC has also increased its use of private-sector debt collection agencies.
The department estimates that the measures introduced since 2021 generated £10.7 billion in additional revenue by the end of 2025-26, against expenditure of £368 million on those measures. The NAO's report therefore identifies a substantial return from the investment made so far.
HMRC collected an estimated £350 in debt for every £1 it spent on debt management staff during 2025-26. However, the NAO warns that simply recruiting more people is likely to produce diminishing returns as the remaining debts become smaller, more complicated and harder to recover.
The next stage must therefore focus on making existing staff and systems more productive.
Technology and easier payment arrangements
The NAO recommends that HMRC improves its processes and makes better use of technology. A new IT system intended to help manage tax debts is in development, but the department needs to manage the risks associated with delivering it successfully.
The watchdog also wants payment plans to be easier to arrange and manage online. Better digital services could help taxpayers resolve straightforward problems without lengthy contact with HMRC, freeing staff to concentrate on more difficult cases.
HMRC has consulted on introducing direct debits to help prevent payment errors. It has also considered extending its powers to recover smaller debts directly from taxpayers' bank accounts. Decisions on these proposals were expected to be announced in the Autumn Budget.
Any expansion of direct recovery powers raises questions about safeguards, the handling of disputed debts and the treatment of people who cannot afford to pay. Effective collection needs to distinguish between those who refuse to meet their obligations and those whose financial circumstances make payment difficult.
The report also calls for HMRC to make better use of evidence about which approaches work best for different types of debtors.
Can HMRC return to pre-pandemic levels?
HMRC aims to reduce tax debt further as a proportion of receipts, forecasting a level between 2.9% and 4.2% by 2029-30.
However, it does not expect to reach the previous target of 2.5% until after that date. The forecasts are also sensitive to economic conditions and the amount of new debt generated.
A further economic downturn, higher business costs or continued pressure on household finances could undermine progress by creating more unpaid tax bills. The NAO recommends that HMRC draws together lessons from the pandemic and subsequent economic shocks so it is better prepared for another crisis.
The wider lesson is that tax collection is not simply a matter of pursuing people after they have failed to pay. Clear payment arrangements, early intervention and systems that help taxpayers avoid mistakes can all reduce the problem before it becomes expensive to resolve.
HMRC has made measurable progress, and the additional revenue recovered is significant. But with £43.8 billion still outstanding and a large proportion potentially uncollectable, the task is far from complete.
For the taxpayer, effective debt collection matters because unpaid taxes ultimately leave a gap in the money available to fund public services or require the government to find revenue elsewhere. The challenge for HMRC is to close that gap without treating every late payer as someone deliberately avoiding their responsibilities.
Source: National Audit Office, HMRC’s management of tax debt, published 23 October 2026.
https://www.nao.org.uk/reports/hmrcs-management-of-tax-debt/