The Government failed to meet the minumim target of two per cent of its GDP, spending just 1.98 per cent.
The news will prove highly embarrassing for Prime Minister Theresa May, who just weeks ago urged European neighbours to spend more on defence during her visit to meet US President Donald Trump.
During her state visit in January, Mrs May stood next to the President and told reporters at a press conference: “I’ve agreed to continue my efforts to encourage my fellow European leaders to deliver on their commitments to spend two per cent of their GDP on defence so the burden is more fairly shared.
“Today we have reaffirmed our unshakeable commitment to this alliance.”
Mr Trump had previously said he might reconsider America's membership in the alliance, as it was costing the country too much money.
And he suggested he would not provide military intervention to countries that did not meet Nato's spending target.
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Britain fell short of its target due to the economy growing faster than expected, outstripping defence spending.
Until the IISS report, Britain was one of just five nations meeting NATO's two per cent target.
Now only the US, Greece and Estonia exceede the requirement, according to the IISS think tank's calculations. P
oland was the other country along with Britain to slip below the target.
However, NATO's official calculation is yet to be revealed, and got yet show Britian fulfilled its commitment to the cause.
NATO has admitted it is "overly reliant" on the US to provide military capabilities, and has campaigned for other member nations to take the target more seriously.