Tax hikes, tariffs, and high interest rates are set to slow the UK’s economic growth significantly in the coming year, according to a recent report from the economic forecasting group EY ITEM Club. While the group has upgraded its GDP growth forecast for 2025, anticipating a 1.5% increase compared to an earlier 1% estimate, it warns of a sharp slowdown to just 0.9% growth in 2026. This cautious outlook reflects a combination of tighter fiscal policy, global trade disruptions, and consumer spending pressures.

EY ITEM Club’s autumn projection arrives ahead of the Bank of England’s interest rate decision this week, with speculation mounting around a potential rate cut. However, the group’s experts expect rates to remain on hold this year, with only two modest cuts next year, bringing the Bank’s rate down to 3.5%. The ongoing high interest rates, combined with anticipated tax increases in Chancellor Rachel Reeves’ upcoming Budget, pose constraints on economic momentum.

The Chancellor’s second Budget, expected in November, is predicted to introduce further tax increases and spending cuts amounting to around £30 billion. These measures are likely to weigh heavily not only on households but also on businesses. Last year's measures included a significant £25 billion increase in employer National Insurance contributions, which has had a dampening effect on employment, wages, and prices across the economy. Alongside this, recent reforms to business rates threaten larger retail outlets, while a rise in the minimum wage is adding to operational costs for firms. The Government’s flagship workers’ rights bill may also increase regulatory burdens.

Recent data from the Institute of Directors highlights business confidence hovering near record lows, with many leaders bracing for further challenges from the upcoming Budget. The looming threat of income tax increases—potentially breaching Labour's manifesto promises—adds to concerns over consumer spending power and overall economic vitality.

The Chancellor’s tax measures already enacted this year offer a glimpse of the fiscal tightening in play. Capital Gains Tax rates were raised substantially in the 2024 Autumn Budget, increasing the lower rate from 10% to 18% and the higher from 20% to 24%. Employers’ National Insurance contributions also rose to 15% on earnings above £5,000, with the threshold lowered from £9,100 to £5,000. Additionally, the surcharge on additional homes under Stamp Duty Land Tax jumped from 3% to 5%, and Inheritance Tax thresholds were frozen until at least 2030.

Despite these increased rates, actual revenue from Capital Gains Tax has paradoxically fallen, as HMRC figures show a significant drop in receipts from nearly £17 billion in 2022/23 to around £13.1 billion in 2024/25. Experts attribute this decline to behavioural changes by taxpayers in response to higher tax rates, which has ultimately reduced overall tax revenues.

Amid these fiscal pressures, UK mortgage lending is projected to double over 2025, driven by stronger consumer sentiment and a resurgence in the housing market, according to earlier forecasts from EY ITEM Club. This trend, along with easing inflationary pressures allowing insurers to reduce premium increases, provides a rare positive note in an otherwise cautious economic environment. However, these factors are not expected to counterbalance the adverse impact of tax hikes, global trade tensions, and high borrowing costs.

The political and fiscal landscape remains fraught, with the Resolution Foundation recently highlighting a £4.4 billion shortfall in the Chancellor's adherence to fiscal rules, further complicating the Budget outlook. The think tank recommended prioritising tax rises over welfare cuts given the deteriorating growth projections and rising borrowing costs.

In sum, while the UK economy shows resilient pockets such as mortgage lending growth and easing insurance premiums, the overall outlook is dominated by the drag from rising taxes, interest rates, and international trade frictions. Businesses remain deeply concerned about the cumulative burden of government policies, warning that continued fiscal tightening could suppress growth and confidence even further in 2026.

📌 Reference Map:

  • Paragraph 1 – [1] (Daily Mail), [5] (Reuters)
  • Paragraph 2 – [1] (Daily Mail), [2] (EY)
  • Paragraph 3 – [1] (Daily Mail), [3] (Pie Tax), [7] (Reuters)
  • Paragraph 4 – [1] (Daily Mail), [4] (CNBC), [3] (Pie Tax)
  • Paragraph 5 – [6] (MoneyWeek), [3] (Pie Tax)
  • Paragraph 6 – [2] (EY)
  • Paragraph 7 – [5] (Reuters), [1] (Daily Mail)

Source: Noah Wire Services