UK unemployment to hit five-year high as tax hikes begin, EY warns

Unemployment in the UK is expected to rise to its highest level in five years by 2026 as previously announced tax increases begin to weigh on growth and employment, according to new forecasts from the EY Item Club.

Forecasters warned that unemployment could rise to 5.2 percent in the first half of this year, up from the current 5.1 percent and the highest level since January 2021, as moderate economic growth is hampered by tight monetary policy and global uncertainty.

The EY Item Club said the tax hikes announced by Rachel Reeves in her first Budget are expected to have a more pronounced impact this year, dampening consumer spending and business investment. Employers have already been hit by a £25 billion increase in national insurance contributions last spring, a move which business groups have warned will dampen employment.

Matt Swannell, EY Item Club’s chief economic adviser, said the effects of monetary tightening are beginning to filter through the economy.

“Additional tax increases may not be expected in 2026, but previously announced measures will begin to increase revenue,” he said. “At the same time, the government will need to strengthen borrowing and keep public spending broad to meet its fiscal obligations.

“This tightening of monetary policy, along with continued uncertainty around the world, is expected to drag on UK growth over the next year or so.”

Economic growth is forecast to remain low. EY Item Club now expects UK GDP to grow by 0.9 per cent this year – slightly higher than its previous estimate of 0.8 per cent, but still weaker than in 2025. Growth is expected to moderate again to 1.3 percent in 2027 and 1.4 percent in 2028.

Reeves announced a further £26 billion of tax rises in last November’s Budget, although, like his previous package, many of those measures will not come into effect for several years. However, the cumulative effect of higher taxes is expected to weigh on confidence.

The EY Item Club said global risk remains high. Trade disputes and tariff disruptions, especially those linked to Donald Trump’s policies, are expected to continue to undermine the private sector.

Financial markets were volatile in January after Trump scrutinized the Nato alliance and announced plans to nominate Kevin Warsh as the next chairman of the Federal Reserve, adding to volatility in currency and commodity markets. Concerns also lingered about inflation and public spending commitments in major economies, including Japan.

In terms of 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, dropping from 4.75 percent to 3.75 percent.

Despite slower growth and rising unemployment, wage growth is expected to remain strong. EY Item Club predicts that average wages will rise by around 3 percent this year, although that will translate into a modest improvement in living standards as higher taxes and prices continue to erode household incomes.

The outlook suggests that while a deep recession is not expected, the UK is facing a period of weak growth and growing pressure on the labor market as financial tightening and global uncertainty converge.