The UK Government Recorded a Surplus of £15.4 Billion in January – Are They Really Out of Money?
- TBA
- 5 days ago
- 5 min read
With a series of tax increases set to officially begin in April as part of the Labour Party's autumn budget, both personal living costs and employer costs will see significant rises.
In the face of widespread opposition to these substantial tax hikes, the Labour government has repeatedly emphasised that the government is facing bankruptcy – the fiscal gap through tax increases and cuts.
However, according to the latest monthly data from the Office for National Statistics (ONS), the UK government posted a surplus of £15.4 billion in January, marking the highest level for that month since records began more than 30 years ago.
So why is the UK government making these statements, despite a surplus of over £10 billion for the month?
What impact does the national debt have on personal and corporate taxes, as well as the broader economic environment?
How should we respond?
Labour's Massive Tax Increases to Bridge a £22 Billion Deficit
On 29th July 2024, the UK's new Chancellor of the Exchequer, Rachel Reeves, revealed the results of a fiscal review in the House of Commons, stating that the previous Conservative government had concealed the true state of public finances, leading to a £22 billion fiscal gap.
To address this financial challenge, the Labour government announced in their first budget plan, released on 30th October 2024, that they would raise £40 billion through tax increases to ensure public service funding and fill the fiscal hole left by the previous government. The key measures include:
Increasing employers' national insurance contributions: This is expected to raise £25 billion.
Raising capital gains tax and inheritance tax: Aimed at making high-income earners pay more, these changes also affect wealthy foreign nationals residing in the UK.
Overall, the Labour government plans to raise public spending by £70 billion annually through tax increases and additional borrowing, to support public services such as the National Health Service (NHS) and make significant investments in schools, hospitals, railways, and energy.
Why Does the UK Government Need to Borrow Money?
The main source of revenue for the UK government is taxation. For instance, workers pay income tax and national insurance, everyone pays VAT on certain goods, and businesses pay tax on their profits.
In theory, the government could cover all expenses solely through taxation, but if tax revenues fall short, the government typically has three options: raise taxes, cut spending, or borrow money.
Borrowed funds must ultimately be repaid, with interest.
How Does the Government ‘Borrow’ Money? How Much Has It Borrowed?
The UK government borrows money by issuing financial products—bonds. Bonds are a financial instrument that promises to repay funds in the future, with most requiring the borrower to pay interest regularly. UK government bonds are known as gilts and are generally considered extremely low-risk, with very little chance of default.
These bonds are mainly purchased by financial institutions both in the UK and abroad, including pension funds, investment funds, banks, and insurance companies. The government issues both short-term and long-term bonds to borrow over different time periods, setting different interest rates.
Meanwhile, the amount borrowed by the government fluctuates every month. Borrowing tends to be lower in January as many people pay a large portion of their annual taxes in one go, including:
Income tax for the previous fiscal year through Self-Assessment by 31 January, alongside prepayment of part of the following year's tax (‘Payments on Account’).
Large companies usually pay corporation tax quarterly, but some small and medium-sized businesses with a financial year ending on 31st December or 31st March will need to pay corporation tax for the previous year in January.
Capital gains tax (CGT) on gains from the sale of assets such as stocks or property, which must be paid by 31st January.
Some VAT payments are due in January, as certain businesses are required to pay VAT quarterly or annually.
In the fiscal year from April 2024 to January 2025, the UK government borrowed a total of £118.2 billion, £11.6 billion more than the previous year.
The total debt owed by the government is referred to as the national debt. Currently, the UK's national debt stands at around £2.8 trillion, roughly equivalent to the UK's annual Gross Domestic Product (GDP)—the total value of all goods and services produced in the country in one year.
Despite the national debt being over twice the level it was during the 1980s and up to the 2008 financial crisis, the debt-to-GDP ratio is still lower than during much of the 20th century and remains lower than that of some other major economies.
Why Is the Government Increasing Debt?
As the government increases borrowing, interest payments on the debt also rise, which will have a far-reaching impact on individuals, businesses, and the overall economic environment.
From the policies that have already been implemented and those set to follow, rising inflation, the end of private school VAT exemptions, increased employer national insurance costs, and the rising minimum wage are all costs that will be passed on to UK households and consumers. Train fares in England and Wales are set to rise by 4.6%, and energy and water bills are also increasing. Disposable incomes are shrinking, putting pressure on household budgets.
The Bank of England is expected to continue cautiously slowing down rate cuts to control inflation, which will keep mortgage and personal loan costs high.
For businesses, higher taxes are already forcing many industries to announce plans for layoffs and reduced investment. If business confidence weakens or companies face operational difficulties, it will directly lead to slower economic growth, or even recession. Higher unemployment and reduced consumer confidence would create a vicious cycle.
Looking Ahead: Preparing for Financial Challenges
Currently, the situation is not as dire as it may seem.
If you want to plan ahead, here are some financial and tax planning suggestions to help you reduce investment risks and navigate the changing economic landscape:
Individuals can explore and legally utilise tax-saving tools such as pension contributions and ISA tax-free accounts to reduce income tax burdens.
In a high-interest rate environment, prioritise paying off high-interest loans and reducing unnecessary borrowing.
Businesses should take advantage of tax credits and capital expenditure deductions to lower tax liabilities.
Consider investing in government bonds, gold, and quality dividend stocks to hedge against economic instability.
Focus on defensive investments, such as government bonds, gold, and high-quality dividend stocks, to offset economic risks.
Diversify asset allocations by balancing UK-based assets and overseas market investments to reduce risks from a potential devaluation of the pound.
If you wish to learn more about the latest financial, accounting, and tax news, or would like to consult with a professional accountant to resolve your financial and tax planning queries, get in touch with us.
TB Accountants can assist you in developing tailored financial, tax, and investment strategies to safeguard your personal and business finances.