Higher spending on digital tools and staff to help reduce fraud and error in the tax system has contributed to a significant increase in administrative costs for HMRC.

According to a recent report from the National Audit Office (NAO), HMRC’s costs of administering the tax system increased by 15% (£563m) in real terms between 2019-20 and 2023–24.

The increase in administrative costs is caused by several factors, said the NAO report, published on 10 February 2025.

The first is the increasing complexity of the tax system. HMRC estimates that the combined effect of changes announced between 2022 and 2024 will increase its costs cumulatively by around £875m over the next few years.

While none of these changes are expected to reduce costs, HMRC believes that some of them will increase revenue in the longer term.

The number of people who need to pay income tax has also increased in the period between 2022–21 and 2023–24, rising from 31.7m in 2020–21 to 36.2m in 2023–24.

This is due to income tax thresholds remaining at the same level since April 2022, and population and employment growth.

The rise has led to an increase in the amount of administrative work required and pushed up the overall cost.

Compliance work is cited in the NAO report as another factor responsible for the increase. The added emphasis HMRC has placed on reducing fraud and error in the tax system has resulted in higher spending on digital tools and staff.

HMRC’s compliance productivity has also fallen and remains below pre-pandemic levels. In the five years prior to the COVID-19 pandemic, compliance staff achieved more than £1.4m per compliance worker in 2023-24 prices. However, performance in 2023–24 is £1.27m per worker, according to data from the report.

The NAO recommends that HMRC takes a holistic view of the cost effectiveness of the tax system, clarifying estimated costs and benefits when placing increased requirements on taxpayers and, where appropriate, spending more when this reduces the overall cost of the system.

“Businesses and individuals deserve a modern, resilient and effective tax system to help them get their tax right first time,” said Gareth Davies, head of the NAO.

“To get the most out of the money it spends on collecting taxes, HMRC must better understand how changes to the system affect the costs it incurs in administering taxes, as well as the financial burden on individuals and businesses.

“HMRC must also ensure the end-to-end system is working well for each tax,” he said.

In its report, the NAO also encouraged HMRC to commit to reducing administrative cost burdens on customers, develop better efficiency and productivity measures, and gain a clearer understanding of the costs and benefits of activities that stop non-compliance from occurring in the first place.

The watchdog estimates that businesses in the country spend £15.4 billion annually to comply with the tax system, with actual figures likely to be higher.

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