How does the government raise money?

The government gets most of the money that it spends each year from taxation and other receipts, with the balance coming from borrowing to fund the deficit (the shortfall between receipts and spending).

The Office for Budget Responsibility has forecast that receipts will amount to £1,304bn in the year ending 31 March 2027 (2026/27), of which £1,172bn is expected to be generated by taxation and £132bn comes from other non-tax sources.

Total receipts are estimated to be equivalent to 41.2% of forecast GDP of £3,165bn in 2026/27, just over two-fifths of the economy. Of this 37.0% of GDP is from taxation and 4.2% from other receipts.

The top five taxes together bring in £897bn or 69% of total receipts:

• £359bn - income tax,
• £220bn - VAT,
• £153bn - employer national insurance,
• £104bn - corporation tax, and
• £61bn - employee national insurance.

This highlights how important these five taxes are to the public finances.

The next five taxes contribute a further £154bn:

• £54bn - council tax,
• £37bn - business rates,
• £24bn - fuel duties,
• £20bn - capital gains tax, and
• £19bn - property transaction taxes. 

This equates to 12% of receipts, bringing the total to 81% for the top 10 taxes. Once all other taxes are accounted for, total taxation in 2026/27 is expected to add up to £1,172bn or 90% of total receipts.

The balance of £132bn or 10% comes from non-tax receipts, including investment income, social housing rents, and the earnings of public corporations.

One way to understand these very large numbers is to divide by the UK population of just under 70 million in 2026/27. Chart 2 illustrates these figures, showing how total tax receipts are equivalent to £1,400 per person per month, while total receipts are approximately £1,560 per month for each person living in the UK.

Where does the money go?

Planned spending in 2026/27 is expected to total £1,416bn. Around half goes on the ‘welfare state’ (health and welfare provision), 43% goes on public services excluding health and social care, and 7% is incurred in debt interest.

The total spending is equivalent to 44.0% of GDP, meaning:

• 21.9% of GDP goes on health and welfare,
• 18.9% of GDP on public services (excluding health and social care), and
• 3.2% of GDP goes on interest.

Chart 3 breaks down public spending into its various components, starting with welfare spending of £400bn, which is about 28% of the total. This includes:

• £169bn for pensioners (of which £138bn is for the state pension),
• £111bn for working age and child benefits (£98bn in universal credit and legacy benefits, and £14bn in child benefit), and
• £120bn in other benefits (of which £50bn is for disability and ill health).

The next category is health and social care of £348bn or 25% of total spending. It comprises £294bn of spending on health care (principally the National Health Service) and £54bn on social care.

The largest component of spending on public services after the NHS is education. This absorbs £145bn (10% of total spending), followed by defence, security, police, courts, border protection and prisons at £137bn (10%), and £69bn (5%) on transport.

Everything else that central and local government do adds up to £182bn, or 13% of total spending.

The debt interest of £135bn (10% of total spending) is equivalent to an interest rate of 4.0% according to the OBR, which is in line with the current Bank of England base rate of 4.0%. This is coincidental because while a proportion of public debt incurs interest at the Bank of England base rate, a significant proportion was borrowed during the last decade when interest rates were very low, while borrowing in the last few years have been at much higher rates.

Spending per capita (see Chart 4) adds up to approximately £1,690 per month for each person living in the UK, of which:

• health and welfare cost around £895 per month,
• public services (excluding health and social care) cost around £635 per month, and
• debt interest costs £160 per month.

What is the outlook for taxation and other receipts?

Chart 5 illustrates how taxes are expected to rise slightly faster that economic growth, with fiscal drag (freezing tax allowances so that they become smaller after taking accounting of inflation) and tax rises announced in the 2024 and 2025 Budgets expected to increase the overall burden of taxation on the economy.

The government’s plan to reduce the gap between receipts and spending requires public spending to be constrained so that it rises at a slower rate than taxes and other receipts, requiring strong cost control and the delivery of a significant amount of efficiency savings.