Are the wealthy dodging more tax than previously thought?

Each year, the taxman publishes a “wealthy tax gap” – an estimate of how much tax is going unpaid by wealthy individuals. Tackling this gap is one of HMRC’s key objectives. Wealthy individuals are defined by HMRC as those who earn more than £200,000, or have assets worth £2 million.

The amount of additional tax HMRC has collected through its compliance work has more than doubled over the past five years, from £2.2 billion in 2019/20 to £5.2 billion in 2023/24. While this is good news for the taxman, it could also suggest non-compliance is more of a problem than previously thought.

The tax gap was previously believed to be around £1.9 billion per year. Given that HMRC’s compliance work has increased annual tax revenues by £3 billion, the figures don’t seem to add up.

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“This raises the possibility that underlying levels of non-compliance among the wealthy population could be much greater than previously thought,” the National Audit Office said in a report published on Friday.

While HMRC deserves credit for increasing tax revenue through its compliance work, "it needs to provide greater transparency to give the public greater confidence that everyone is paying their fair share”, said Gareth Davies, head of the National Audit Office.

HMRC plans to look carefully at the National Audit Office’s recommendations and respond formally by the autumn. “It’s our duty to ensure everyone pays the right tax under the law, regardless of wealth or status,” a HMRC spokesperson told MoneyWeek.

The HMRC spokesperson added that the government is “delivering the most ambitious ever package to close the tax gap and bring in an extra £7.5 billion for public services per year by 2029-30.”

Taxes have been under a particular spotlight over the past year, after the government announced £40 billion of tax hikes in the Autumn Budget. Some high-net worth individuals have reported leaving the UK to take advantage of other tax regimes elsewhere.

Reeves’s crackdown on unpaid tax

In her Spring Statement in March, chancellor Rachel Reeves Reeves said the government would invest in 500 more HMRC compliance staff, building on the 5,000 already announced in the 2024 Autumn Budget.

The consequences of non-compliance could also become harsher, with Reeves looking to increase the number of convictions for tax fraudsters by 20%.

Meanwhile, a separate government project is focused on digitalising parts of the tax system to reduce the scope for error while improving certainty and control.

That said, the complexity of the system means clamping down on unpaid tax is no small challenge. Some taxpayers fall into the trap of non-compliance without even realising it, simply because they don’t fully understand the rules.

The wealthy could be at particular risk given the diversity of their income streams and assets.

“The complexity of their tax affairs may increase the potential for non-compliant behaviour, either deliberately in the form of tax avoidance or evasion, or mistakenly, by applying tax rules incorrectly,” the National Audit Office said.

Wealthy still shouldering a significant tax burden

The latest data doesn’t mean the wealthy aren’t shouldering a significant tax burden. In fact, the opposite is true. Two percent of the taxpaying population is defined as wealthy by HMRC. This group paid £119 billion in personal taxes in 2023/24, equivalent to 25% of the total amount collected.

For this reason, many wealthy taxpayers are taking legal steps to reduce their tax liability. This could include holding assets in trust for someone else, investing in tax-efficient schemes like venture capital trusts, or timing the sale of assets carefully to use up tax-free allowances.

While steps like this are legal and in some cases make good financial sense, they can add to an already complex picture. High net worth individuals should seek the assistance of a financial adviser or tax planner who can help them reduce their liability while staying firmly within the regulations.

“Navigating the tax system appears to be becoming more difficult rather than simpler for many taxpayers,” a cross-party group of MPs said in a report published earlier this year. “Complexity is increasing, which adds cost, can lead to taxpayers making more mistakes and creates opportunities for avoidance and evasion.”