In a remarkable financial turnaround, the UK government has reported a record surplus of £30.4 billion for January, driven by an increase in capital gains tax, National Insurance contributions, and higher income tax receipts. This surplus, the largest since records began in 1993, significantly surpasses January 2025’s figure of £15.4 billion and sets a positive tone ahead of Chancellor Rachel Reeves’ upcoming Spring Statement.
Surge in Tax Receipts
The Office for National Statistics (ONS) revealed that total tax receipts reached £133.3 billion in January, reflecting a 13.8% increase compared to the same month last year. This surge can largely be attributed to a substantial rise in capital gains tax, which generated nearly £17 billion—an impressive 69% increase from January 2025. Analysts believe this uptick indicates that investors are liquidating assets ahead of anticipated tax increases outlined in the forthcoming October Budget.
Additionally, National Insurance contributions rose by £2.9 billion, further bolstering government income. Income tax receipts also saw a noteworthy increase, amounting to £3.6 billion more than the previous year. Paul Dales, chief economist at Capital Economics, attributed part of this growth to the government’s decision to freeze income tax thresholds, inadvertently pushing more taxpayers into higher brackets as their earnings increase.
Public Borrowing Trends
While the January surplus paints a positive picture, the overall borrowing for the ten months leading up to January stands at £112.1 billion, marking an 11.5% reduction from the same period last year. However, this figure still represents the fifth-highest borrowing level recorded for this timeframe. The Treasury has forecasted that borrowing for the fiscal year 2026 is expected to be the lowest since before the pandemic.
James Murray, Chief Secretary to the Treasury, acknowledged the importance of addressing the significant debt interest burden. He stated, “We know there is more to do to stop one in every £10 the government spends going on debt interest, and we will more than halve borrowing by 2030-31 so that money can be spent on policing, schools and the NHS.”
Economic Outlook and Challenges
Despite the positive January figures, economists caution that the public finances remain precarious. Wage growth and economic expansion continue to lag, with the economy growing by a modest 1.3% in 2025. Dales warned that the overall economic outlook suggests minimal growth this year, potentially constraining the Chancellor’s ability to navigate political pressures effectively.
Shadow Chancellor Mel Stride has been vocal in criticising the current government’s financial strategies, citing “record high taxes and irresponsible spending” as detrimental to economic vitality. He expressed concerns over the stagnant economy and Labour’s purported lack of a growth strategy.
Upcoming Financial Update
Chancellor Reeves is set to provide an update on the state of the nation’s finances on 3 March, which will include fresh forecasts from the Office for Budget Responsibility regarding the trajectory of the UK’s fiscal health. Despite facing scrutiny over her public borrowing rules, which mandate that day-to-day spending be financed through tax revenues, Reeves remains steadfast in her approach, describing these rules as “non-negotiable.”
As discussions around fiscal policy intensify, the government faces the dual challenge of maintaining financial discipline while fostering economic growth, all under the watchful eye of critics and constituents alike.
Why it Matters
This unprecedented January surplus underscores the complexities of the UK’s economic landscape. While the immediate financial boost offers a glimmer of hope, persistent challenges such as stagnant wage growth and rising unemployment pose significant hurdles. As the government prepares to unveil its financial strategy in March, the balance between fiscal responsibility and stimulating economic growth will be paramount in shaping the future of the UK economy.
