UK unemployment is expected to rise to its highest level in five years in 2026, as previously announced tax rises weigh on growth and hiring, according to new forecasts from the EY Item Club.
Forecasters warned that the unemployment rate could peak at 5.2 percent in the first half of this year, up from 5.1 percent currently and the highest level since January 2021, as modest economic growth is constrained by tighter fiscal policies and global uncertainty.
The EY Item Club said tax rises announced by Rachel Reeves in her first budget will have a more significant impact this year, dampening both consumer spending and business investment. Employers were already hit by a £25 billion rise in national insurance contributions last spring, a move that business groups have warned would slow hiring.
Matt Swannell, chief economic adviser at EY Item Club, said the impact of fiscal tightening is only now being felt in the economy.
“Further tax increases may not be expected in 2026, but measures already announced will begin to increase revenue,” he said. “At the same time, the government must limit borrowing and largely stagnate public spending in order to comply with its fiscal rules.
“This fiscal tightening, along with ongoing global uncertainty, is likely to slow UK growth over the next year or so.”
Economic growth is likely to remain subdued. The EY Item Club now expects UK GDP to grow by 0.9 percent this year – slightly higher than its previous estimate of 0.8 percent, but still weaker than in 2025. Growth is then expected to recover slightly, rising to 1.3 percent in 2027 and 1.4 percent in 2028.
Reeves announced a further £26bn of tax rises in November last year’s Budget, although as with her previous package, many of these measures will not take effect for several years. Still, the cumulative impact of higher taxes is expected to weigh on confidence.
The EY Item Club said global risks remain a major headwind. Trade tensions and tariff disruptions, particularly related to Donald Trump’s policies, are expected to continue to weaken private sector sentiment.
Financial markets were jittery in January after Trump tested NATO alliances and announced plans to name Kevin Warsh as the next head of the Federal Reserve, increasing volatility in currency and commodity markets. Concerns about inflation and public spending commitments also remain in major economies, including Japan.
On monetary policy, the EY Item Club expects the Bank of England to hold interest rates steady at its meeting this week before cutting again in April. Rates were cut four times last year, falling from 4.75 percent to 3.75 percent.
Despite slower growth and rising unemployment, wage growth is expected to remain relatively robust. The EY Item Club predicts that average salaries will rise by around 3 percent this year. However, this will only translate into a modest improvement in living standards as higher taxes and prices continue to reduce household incomes.
The outlook suggests that while a deep recession is not expected, the UK faces a period of weaker growth and increasing labor market pressures as fiscal tightening and global uncertainty converge.
