UK Public Finances Under Pressure Despite Rising Tax Revenues

Latest figures suggest that higher revenues alone may no longer be enough to offset broader economic and political challenges – a development that matters to businesses, investors and households alike.

Tom Goddard, Assistant Manager, said:

HMRC collected £87.3 billion for the month April 2026, up £6.3 billion from the April 2025 taking, but despite strong revenue figures, public finances face significant strain. The deficit for April 2026 reached £24.3 billion, the worst deficit at the start of a financial year since 2020/21, when the covid pandemic was at its height, and £3.4 billion above the OBR’s forecast of £20.9 billion.

Why the Deficit Matters

A growing deficit means the Government is borrowing more to fund day-to-day spending. While borrowing increased sharply during the pandemic, markets and policymakers had expected public finances to gradually stabilise. Instead, the latest figures suggest pressure is intensifying again.

For businesses, this raises the likelihood of future policy intervention – whether through tax increases, spending restraint or both. With economic growth still subdued and inflationary pressures lingering, the Government’s room for manoeuvre appears limited.

This overshoot puts immediate pressure on the government’s self-imposed fiscal rules, with Chancellor Rachel Reeves having little room to absorb further slippage without revisiting spending or taxation. The government is entering the 2026/27 financial year with its fiscal headroom under immediate and meaningful pressure and with little in the macro environment to suggest conditions will ease in the near term.

The reference to “fiscal headroom” is significant. Governments typically aim to maintain a buffer between expected borrowing levels and the limits imposed by their own fiscal rules. When that margin narrows, even modest economic shocks can force difficult political and economic decisions.

Strong Tax Receipts Reflect Economic Resilience

Income tax, National Insurance Contributions (NICs) and VAT accounted for £72.3 billion of the total tax take. PAYE receipts reached £32.2 billion, a record for a month, this is likely driven as a result of year-end bonuses being issued (mainly in the financial sectors). Business tax receipts rose to £5.3 billion, £0.5 billion above the same month last year.

For employers, these figures reinforce the continued importance of payroll and employment taxes as a major source of Treasury income. That may increase scrutiny around tax compliance and remuneration structures in the years ahead.

At the same time, the Government’s increasing reliance on employment-related taxes could become more challenging if labour market conditions weaken further.

Inflation Relief May Be Temporary

April’s inflation data offered a rare moment of relief, with CPI falling to 2.8% which was below the 3.0% that financial markets had expected, down from 3.3% in March. The drop was driven primarily by the introduction of Ofgem’s new energy price cap on 1 April, which reduced household electricity and gas costs sharply, helping to offset the continuing surge in motor fuel prices linked to the conflict in the Middle East.

However, wider economic risks remain firmly in place. Geopolitical tensions, rising fuel costs and weaker business activity continue to cloud the outlook.

Tom concluded:

The Organisation for Economic Co-operation and Development (OECD) has separately forecast UK inflation to reach 4% in 2026 and has identified the UK as the G20 advanced economy most exposed to impact of the Middle East conflict. Business activity has fallen to a one-year low, job vacancies are at a five-year low in the three months to April 2026, and the Prime Minister faces a leadership contest that adds a further layer of political uncertainty.

What This Could Mean Next

Taken together, the figures point to a difficult balancing act for policymakers. Higher taxes are generating more revenue, but spending pressures, inflation risks and weak economic momentum are eroding the benefits.

For businesses, this environment increases uncertainty around future tax policy, public spending priorities and economic growth prospects. Sectors dependent on consumer confidence or Government investment may face particular sensitivity if fiscal tightening becomes necessary.

Individuals may also feel the effects indirectly through higher taxation, reduced public spending or persistent cost-of-living pressures if inflation rises again later in the year.

The figures also reinforce a broader theme emerging across the UK economy: while headline tax revenues remain strong, underlying economic conditions are becoming increasingly fragile.

What You Should Consider Next

Businesses should consider:

Reviewing financial forecasts and stress-testing budgets against slower growth or higher borrowing costs.

Monitoring potential tax policy changes ahead of future fiscal statements.

Assessing workforce and remuneration strategies in light of continued reliance on employment taxes.

Evaluating exposure to inflation-sensitive costs, particularly energy, fuel and supply chains.

Individuals should consider:

Reviewing long-term financial and inheritance planning, particularly ahead of the planned inclusion of pension wealth within the scope of inheritance tax from April 2027.

Preparing household budgets for the possibility of renewed inflationary pressures later in the year.

Staying alert to potential tax and spending changes as the Government responds to mounting fiscal pressures.

Would you like to know more?

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact.