Category: Data

To understand the UK’s public finances, one must look at both sides of the ledger simultaneously. For the 2025/26 financial year, the Office for Budget Responsibility (OBR) forecasts that the government will collect £1,232 billion in taxes and other receipts, but it plans to spend £1,295 billion.

The difference between these two figures leaves a shortfall of approximately £63 billion.

This gap is not an anomaly caused by a sudden economic shock like a pandemic or a financial crisis. Instead, it represents a structural deficit—a persistent imbalance between what the modern UK state is mandated to provide and what the current tax system is capable of raising.

By putting the receipts and spending data side-by-side, the underlying mechanics of this £63 billion shortfall become clear. It is the result of a “revenue ceiling” meeting an “expenditure floor.”

The Revenue Ceiling: A Concentrated Tax Base

The UK tax system is highly effective at raising capital, with the overall tax burden forecast to reach a post-war high of roughly 38.3% of GDP. However, the data reveals that this revenue relies heavily on a narrow demographic foundation.

• Heavy Reliance on Income Taxes: Income Tax and National Insurance combined account for over £530 billion—nearly 45% of all government revenue.
• A Top-Heavy System: As demographic data shows, the vast majority of this revenue is generated by a small percentage of high-earning, working-age individuals. The top 10% of earners contribute roughly 60% of all Income Tax.

This concentration creates a “revenue ceiling.” Governments face significant political and economic friction when attempting to raise taxes further on this small group of high earners. Conversely, attempting to broaden the tax base by raising taxes on the lower-earning majority—either through basic rate Income Tax hikes or increasing indirect taxes like VAT—carries heavy political risks and disproportionately impacts the cost of living for poorer households.

The expenditure floor: The cost of demographics

While revenue generation is constrained, public spending is subject to relentless upward pressure, creating a rigid “expenditure floor.”

• The Dominance of Health and Welfare: Combined, Welfare & Pensions (£368bn) and Health (£202bn) consume roughly 44% of total public spending. Unlike capital investments (such as building roads or railways), these are day-to-day statutory obligations.
• The Aging Population: Both of these massive budgets are intrinsically linked to demographics. An aging population guarantees year-on-year increases in State Pension costs (further amplified by the “Triple Lock”) and structurally higher demand for NHS and social care services. These costs rise independently of economic growth.

The compounding cost: Debt interest

When the expenditure floor exceeds the revenue ceiling, the government must borrow money from financial markets by issuing government bonds (gilts) to fund the £63 billion difference.

This borrowing is where the structural deficit becomes a compounding issue.

Because the UK has run a deficit for most of the last two decades, it has accumulated a substantial national debt. Servicing this debt is now one of the largest single line items in the budget. At £98 billion for 2025/26, debt interest payments are significantly larger than the entire Defence or Public Order budgets, and nearly equal to the Education budget.

Crucially, this £98 billion does not buy new hospitals, fund schools, or build infrastructure—it merely services past borrowing. When a government must borrow just to pay the interest on previous borrowing, fiscal flexibility is severely limited.

The Fiscal Trilemma

The £63 billion gap between the £1,232bn coming in and the £1,295bn going out illustrates a fundamental fiscal trilemma facing policymakers. To close a structural deficit, a government ultimately has only three levers to pull:

1. Raise Taxes: Further increase the tax burden on a historically highly-taxed population, risking economic stagnation or capital flight.
2. Cut Spending: Reduce the scope of the state, which is politically difficult given the aging population and existing pressures on the NHS and welfare system.
3. Accept the Deficit: Continue borrowing to bridge the gap, accepting that a growing share of future tax revenue will be diverted away from public services to pay debt interest.

Without sustained, rapid economic growth to organically boost tax receipts without raising tax rates, the UK’s public finances will remain a delicate balancing act between these three difficult choices.

For the 2025/26 financial year, Total Managed Expenditure (TME) for the UK public sector is forecast to reach £1,295 billion. To put this macro-economic figure into perspective, it equates to approximately £45,280 being spent for every household in the country.

Total spending currently sits at historically high levels – roughly 44% of GDP – driven by long-term demographic shifts, post-pandemic economic realities, and the rising cost of servicing national debt.

By breaking down the budget, we can observe that the vast majority of government revenue is consumed by a few core areas, leaving a relatively small envelope for all other state functions.

The “big two”: welfare and health

The modern UK state is primarily a mechanism for social protection and healthcare. Together, these two areas account for nearly half of all government spending.

• Welfare & Pensions (£368 Billion): This is by far the largest single block of public expenditure. The primary driver is the State Pension (£148bn), which continues to grow due to an aging demographic and the “Triple Lock” policy guaranteeing annual increases. Additionally, spending on working-age benefits, particularly disability and incapacity benefits (£45bn), has seen a sharp, structural upward trend since 2020.
• Health (£202 Billion): Healthcare spending has grown faster than the wider economy for decades. The core NHS England budget (£168bn) absorbs over 40% of all day-to-day departmental spending across Whitehall. This budget is under continuous pressure from an aging population, the rising cost of medical technology, and the need to address treatment backlogs.

The cost of borrowing: debt interest

Perhaps the most significant shift in the UK’s fiscal landscape over the past five years is the cost of servicing the national debt.

• Debt Interest (£98 Billion): Following a period of record-low interest rates in the 2010s, the cost of government borrowing has surged. At £98 billion, debt interest is now the fourth-largest area of public spending. It is significantly larger than the entire Defence budget and nearly eclipses the total budget for Education. This represents a fixed cost that cannot be actively managed down without paying off the underlying debt, effectively limiting the funds available for public services or tax cuts.

Education and core state functions

Beyond welfare, health, and debt, the remaining budget must cover all other functions expected of a modern state.

• Education (£112 Billion): The third-largest spending area covers everything from early years childcare to university funding. While spending per pupil in schools is being maintained in real terms, the sector faces a demographic shift with falling primary school pupil numbers, which alters funding dynamics at the local level.
• Defence (£61 Billion): Maintained at approximately 2.2% of GDP, the defence budget covers the armed forces, operations, and capital procurement (such as the nuclear deterrent).
• Public Order and Transport (£84 Billion Combined): The criminal justice system (police, courts, prisons) and national transport infrastructure share a smaller slice of the pie. These “unprotected” departments often face the tightest real-terms spending settlements when budgets are constrained by the demands of Health and Welfare.

The constrained fiscal environment

The spending breakdown reveals a highly constrained fiscal environment. The largest areas of expenditure—pensions, healthcare, and debt interest—are largely non-discretionary. They are driven by demographic realities, inflation, and global interest rates, rather than active policy choices.

Consequently, any attempt to reduce total spending requires confronting these massive budgets, while any desire to increase spending on smaller departments (like Transport or Justice) requires finding significant new revenue or accepting a higher deficit.

The United Kingdom government is projected to collect £1,232 billion in total public sector current receipts during the 2025-26 financial year, according to the Office for Budget Responsibility. This figure represents approximately 40.5% of national income, equivalent to £43,077 per household. Taxes comprise 90% of these receipts, with the remainder generated from interest on assets and the operating surpluses of public corporations.

Income tax and national insurance contributions remain the primary engines of state revenue, collectively expected to raise approximately £530 billion. This concentration of revenue sources means that nearly 43 pence of every pound collected by the exchequer originates from levies on personal earnings. Within this category, income tax is forecast to raise £324.6 billion, while national insurance contributions are expected to provide £205.4 billion. The Office for Budget Responsibility notes that national insurance receipts will rise due to the recent increase in employer contribution rates and the lowering of the secondary threshold.

Value added tax serves as the third largest contributor, with a forecast yield of £179.6 billion, representing 14.6% of all receipts. Corporate tax receipts are anticipated to contribute £108.4 billion, reflecting the continued impact of the 25% main rate. While these four major taxes account for two-thirds of total revenue, the treasury also relies on smaller levies such as business rates, council tax, and fuel duty to meet its spending requirements.

The UK government is forecast to raise approximately £1.13 trillion in revenue for the 2025/26 financial year. While the aggregate figure is well-publicized, the distribution of this burden – who pays, how much, and through which mechanisms – is often less understood.

By analysing official data from HMRC and the Office for National Statistics (ONS), we can observe distinct, and often opposing, forces at work within the tax system.

The “career prime” peak (age and gender)

Tax contribution is deeply tied to our life stages. As the chart below illustrates, tax revenue follows a clear “hill” shape.

Contribution is low when we are starting our careers, ramps up significantly in our 30s, and hits a peak between the ages of 45 and 54.

This decade is typically the “career prime” for many workers—where experience, seniority, and hourly wages converge to produce the highest earnings. This single age bracket contributes roughly 30% of all income tax.

However, the chart also highlights two societal challenges:

1. The Gender Gap: Men contribute nearly two-thirds of all income tax. This is not because tax rates are different based on gender, but because it reflects the wider economy: more men occupy higher-paying senior roles, and more women work part-time, often balancing careers with care responsibilities, keeping their total taxable income lower.
2. The Retirement Cliff: As people leave the workforce and rely on pensions, their tax liability falls. In an aging society where people are living longer post-retirement, this creates significant pressure on the working-age population behind them.

The heavy lifters (income groups)

If the Age/Gender chart shows when we pay tax, the Income Group chart shows how much.

The UK operates a "progressive" tax system. This is a deliberate political design meaning the more you earn, the higher percentage of your income you pay.

The results of this design are that the UK tax base is incredibly top-heavy:

• The Top 1%: This tiny group—about 340,000 people earning over £192,000 a year—contributes 29.1% of all Income Tax. To put that in perspective, the tax paid just by the top 1% is roughly equivalent to the entire budget of NHS England.
• The Top 10%: If you combine the top two green bars, you find that those earning over roughly £60,000 (the top 10% of earners) pay 60% of the nation's entire Income Tax bill.

Conversely, the "Bottom 50%" of earners contribute only about 10% of the total. This is largely due to the Personal Allowance, which allows everyone to earn their first £12,570 tax-free, protecting the lowest earners from Income Tax entirely.

Direct and indirect taxation: The hidden counterbalance

When we look exclusively at direct taxes - principally income tax - the data reveals a highly concentrated tax base. The system is designed to be progressive, meaning contributions rise disproportionately with earnings.

However, focusing solely on income tax provides an incomplete picture. A different dynamic emerges when we analyse Indirect taxes - levies such as Value Added Tax (VAT), fuel duty, and duties on alcohol and tobacco.

Unlike income tax, which targets earnings, these taxes target consumption. Because lower-income households tend to spend a larger proportion of their earnings on essentials and goods subject to VAT (saving less than high earners), the burden of these taxes falls differently.

ONS data on The Effects of Taxes and Benefits shows an inverse relationship compared to Income Tax:

• Cash Terms: High-income households pay more in absolute terms simply because they consume more.
• Percentage Terms: Low-income households pay a significantly higher percentage of their disposable income in indirect taxes.

For the poorest 10% of households, indirect taxes can account for roughly 22% of their disposable income. For the richest 10%, this figure drops to approximately 8-9%, as a larger portion of their money flows into savings, investments, or mortgages, which do not attract VAT.

A complex balancing act

The UK tax system is structurally top-heavy regarding income, relying on a small demographic of high-earning, working-age individuals to fund the bulk of public services.

Yet, when expenditure is factored in, the system exerts a heavier proportional pressure on lower-income households through indirect taxation. Understanding both sides of this equation - the progressive nature of income tax and the regressive nature of consumption taxes - is essential for any informed discussion on fiscal responsibility and fairness.