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 £1,139bn in the year ending 31 March 2025 (2024/25), of which £1,016bn comes from taxation and £123bn comes from other sources (see Chart 1).

This is equivalent to 40.9% of forecast GDP of £2,786bn in 2024/25, just over two-fifths of the economy. Of this 36.5% of GDP comes from taxation and 4.4% comes from other sources.

The top five taxes together bring in £775bn or 68% of total receipts:

• £303bn - income tax,
• £203bn - VAT,
• £113bn - employer national insurance,
• £101bn - corporation tax, and
• £55bn - employee national insurance.

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

The next five taxes contribute a further £133bn:

• £43bn - council tax,
• £32bn - business rates,
• £25bn - fuel duties,
• £15bn - capital gains tax, and
• £14bn - property transaction taxes. 

This equates to 12% of receipts, bringing the total to 80% for the top 10 taxes. Once all other taxes are accounted for, total taxation in 2024/25 is expected to add up to £1,016bn or 89% of total receipts.

The balance of £133bn or 11% 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 over 69 million. Chart 2 illustrates these figures, showing how total tax receipts are equivalent to £1,220 per person per month, while total receipts are approximately £1,370 per month for each person living in the UK.

Where does the money go?

Planned spending in 2024/25 is expected to total £1,226bn. Around half (£611bn) goes on the ‘welfare state’ (health and welfare provision), £526bn goes on public services excluding health and social care, and £89bn 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 £315bn, which is about 26% of the total. This includes:

• £153bn for pensioners (of which £138bn is for the state pension),
• £103bn for working age and child benefits (£89bn in universal credit and legacy benefits, and £14bn in child benefit), and
• £59bn in other benefits (of which £40bn is for disability and ill health).

The next category is health and social care of £296bn or 24% of total spending. It comprises £251bn of spending on health care (principally the National Health Service) and £45bn is for social care.

The largest component of spending on public services after the NHS is education. This absorbs £131bn (11% of total spending), followed by defence, security, police, courts, border protection and prisons at £118bn (10%), and £59bn (5%) on transport.

Everything else that central and local government do adds up to £218bn, or 17% of total spending.

The debt interest of £89bn (7% of total spending) is equivalent to an interest rate of 3.2% on the average debt of £2,694bn at the beginning of the financial year in April 2024 and a forecast of £2,793bn in March 2025. This is lower than the current Bank of England base rate of 5.25% because a significant proportion of existing government debt was borrowed during the last decade when interest rates were very low.

Spending per capita (see Chart 4) adds up to approximately £1,475 per month for each person living in the UK, of which:

• health and welfare cost around £735 per month,
• public services (excluding health and social care) cost around £635 per month, and
• debt interest costs £105 per month.

What is the outlook for taxation and other receipts?

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

The current plan calls for public spending to be constrained so that it rises at a slower rate than taxes and other receipts. However, economic commentators believe that these plans are unrealistic given commitments to protect health, defence and education spending. Such commitments imply that there will need to be significant cuts to spending on ‘unprotected’ public services, such as policing, the courts, prisons and local authorities among others.

A three-year Spending Review (for 2025/26, 2026/27 and 2027/28) was scheduled for this summer, but has been deferred until the autumn due to the general election. The review is expected to identify the need for higher spending than currently assumed in the forecasts, presenting a significant financial challenge for the incoming government.