A remarkable surge in tax revenues has propelled the UK government to achieve a record surplus of £30.4 billion in January, the highest monthly surplus since records began in 1993. This financial windfall, driven by increased capital gains tax, National Insurance contributions, and income tax receipts, has provided Chancellor Rachel Reeves with a glimmer of optimism ahead of the upcoming Spring Statement. However, experts caution that while these figures are promising, the overall economic landscape remains precarious.
Record-Breaking Surplus
The Office for National Statistics (ONS) revealed that the surplus nearly doubled from January 2024’s figure of £15.4 billion, setting a new benchmark for government finances. The uptick in tax collections, totalling £133.3 billion, outpaced government spending significantly, which typically occurs in January due to self-assessment tax payments. Analysts had previously forecasted a surplus of approximately £23.8 billion, making the actual figure a stunning surprise.
Jason Hollands, managing director at Evelyn Partners, attributed much of this surge to a dramatic rise in capital gains tax receipts. The £17 billion collected in January 2026 marked a 69% increase compared to the same month in 2025, likely driven by investors selling off assets in anticipation of an impending tax hike announced in the October 2024 Budget.
National Insurance and Income Tax Contributions Surge
National Insurance contributions also played a vital role in boosting government revenues, with an increase of £2.9 billion reported for January. Furthermore, income tax receipts rose by £3.6 billion compared to the previous year. Paul Dales, chief economist at Capital Economics, noted that the freeze on income tax thresholds has effectively pushed more individuals into higher tax brackets as their incomes rise, contributing to the increase in income tax collections.
While borrowing over the ten months leading to January was recorded at £112.1 billion—a decrease of 11.5% compared to the previous year—the ONS highlighted that this figure still represents the fifth-highest borrowing level for that period on record. The Treasury’s forecast suggests that borrowing for 2026 could be the lowest since before the pandemic, a point that Chief Secretary to the Treasury James Murray emphasised with a commitment to significantly reduce borrowing by 2030-31.
Economic Growth Remains a Concern
Despite the positive news regarding tax revenues, economists express caution about the broader economic context. Dales remarked that while January’s figures indicate a “healthy start” to the year, they must be viewed in the light of ongoing economic stagnation. Wage growth has slowed, and unemployment has reached a five-year high, suggesting that the apparent retail boom—partly driven by temporary spending on health products—may not be sustainable.
Shadow Chancellor Mel Stride has been quick to criticise Labour’s fiscal policies, claiming that “record high taxes and irresponsible spending have weakened the economy.” With inflation still exceeding targets and growth stagnant, Stride argues that Labour lacks a coherent growth strategy.
The Road Ahead for the Chancellor
As Chancellor Reeves prepares to present her Spring Statement on 3 March, she will face the challenge of addressing these mixed economic signals. The forthcoming announcement is expected to include updated forecasts from the Office for Budget Responsibility regarding the future trajectory of the UK’s finances. Criticism of Reeves’ public borrowing rules, which dictate that day-to-day spending must be financed by tax revenues, continues to loom large over her fiscal strategies.
In defence of her policies, Reeves has labelled the borrowing rules as “non-negotiable,” asserting that they are designed to ensure fiscal responsibility. The government must navigate these turbulent waters carefully, balancing the pressures of public finances against the need for economic growth and stability.
Why it Matters
The record surplus reported for January is a double-edged sword; while it showcases the government’s ability to generate revenue, it simultaneously highlights the fragility of the UK’s economic recovery. As the Chancellor prepares for her Spring Statement, the focus will be on whether these figures can translate into sustained economic growth or if they are merely a fleeting moment of fiscal relief in an otherwise turbulent landscape. The decisions made in the coming weeks will have far-reaching implications for the government’s financial strategy and the economic wellbeing of the country.