The Diocese of Leeds says the absence of a bishop and financial secretary for two years has posed "administrative challenges".
The Tablet reported that the deficit comes despite a £1.5 million increase in income to just above £11 million in comparison to the year before.
The diocese regularly runs a budget deficit but despite this a spokesperson said the last year had been "financially good" and "due to measures taken by the finance board over the past few years, this year we expect to break even."
The annual report submitted alongside accounts says the diocese will try and control parish spending as a priority and there has been a building freeze on parish projects since last year.
In 2014 Bishop of Leeds, Marcus Stock said he would not spend any more money and promised "frugal" leadership.
It has made several cutbacks in spending, and is currently meeting its loan repayments.
The problems were thought to have occurred in the two year gap between the departure of Archbishop Arthur Roche and the appointment of Bishop Marcus Stock.
In the interim period the diocese was run by an administrator with limited powers who was unable to make an appointment to financial secretary.
According to the report "The Holy See asked the diocesan administrator not to proceed with a permanent appointment of a financial secretary, which had posed administrative challenges."
It added: "during the period without a bishop planning for the future is minimal."
The diocese has bank loans totalling £10,575,000, which the diocese says were necessary to fund projects. It has been reported that these loans are being paid back quarterly in accordance with agreed schedules of payments.
The accounts show school costs - the Church is responsible for 10 per cent of school building improvements - rose from £553,000 in the year ending March 2013 to £720,000 in the year to March 2014.
However other expenses have been cut.
According to the Charity Commission website, Leeds' annual return for 2014 was received late.
Christopher Lamb, the Assistant Editor of Catholic newspaper The Tablet, told Premier's News Hour: "The reason why this matters is because effectively ordinary Catholics in the parishes of Leeds are the people who are going to be asked to help the diocese to basically balance the books.
"The costs of a diocese in the Catholic are numerous. They include clergy allowances, they include money for schools, running a central office...
"There have been other dioceses who've been in trouble in the past... They tend not to have large loans so that is something that I think is unusual in the Leeds case.
"Where a diocese hasn't got a bishop, then big appointments such as appointing a full-time financial secretary couldn't be made, and it left them with some administrative challenges, so the big decisions, the tough decisions that had to be taken, hadn't been able to be taken during that period."
Premier has contacted the diocese for a statement and is awaiting a response.
Listen to Christopher Lamb speaking to Premier's Des Busteed on the News Hour:
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