OK, you are trying to connect using SFTP protocol to FTP port 21. I assume that's mistake. Your server is FTP, right? Not SFTP.

WinSCP does not support tunneling FTP sessions.
But you can tunnel it through PuTTY, see:
https://winscp.net/eng/docs/guide_tunnel#ftp_putty

I did post the logs but removed it in case it contains any sensitive data I missed.

I meant SSH tunnel is authenticated just fine, then it opens FTP link to 127.0.0.1 (as the /var/log/vsftpd.log logs shows) but then it never logs-in the FTP server, it just hangs there.

See re-attached log.

Sorry, I do not understand what you mean by "WinSCP authenticate ok ... but it never logs in". Also it does not look like you have posted the log.

I've setup a new server and want to connect using WinSCP without having FTP access directly on the server, but through SSH and once on the server connect to FTP 127.0.0.1 on port 21.

SSH tunnel appears to work fine, WinSCP authenticate ok, then connect to the FTP, but it never logs in and reports a timeout!?

Here are what I get in various logs:

==> /var/log/syslog <==

==> /var/log/vsftpd.log <==

Attached is full log for WinSCP.

I've spent a few hours on this and can't find what is wrong with the configuration.
At first WinSCP told me to disable "Optimize buffer size" (translated from French), which I did to no avail.

I tried disabling firewall entirely it didn't appear to help.

Any help would be very much appreciated.

EDIT: I finally dropped the SSH Tunnel configuration and it worked, however I wanted to use a different FTP user and cannot in this way :(