Britain’s jobless rate is set to climb to its highest point in half a decade during the opening months of 2026, according to fresh projections from the EY Item Club released today.
The forecasting group anticipates unemployment reaching 5.2 per cent in the first half of this year, driven by weakening economic momentum and reductions in government workforce numbers.
November’s figures already showed the rate had risen to 5.1 per cent, following tepid GDP expansion and mounting costs for businesses.
The EY Item Club expects conditions to improve thereafter, with unemployment projected to retreat to 4.7 per cent by 2028.
Workers can expect their pay packets to grow more slowly in the coming months, with wage increases forecast to moderate to approximately 3 per cent.
This deceleration stems from the rise in employer National Insurance Contributions working its way through the economy.
Combined with climbing joblessness and the ongoing freeze on income tax thresholds, household finances face a squeeze.
The EY Item Club projects that real income growth will contract from one per cent to just 0.8 per cent over the course of 2026.
Taxes threaten business owners | GETTY
These pressures on take-home pay arrive as families already contend with elevated living costs across essential goods and services.
Economic output is expected to expand by just 0.9 per cent this year, marking a notable slowdown from the 1.4 per cent growth forecast for 2025.
Tax increases and spending reductions are weighing heavily on activity, with private sector investment anticipated to contract by 0.2 per cent as companies face mounting pressure.
The strain on smaller enterprises has been particularly acute, with research from wealth manager Rathbones revealing that one in five small businesses cut staff during 2025.
Unemployment has hit 5.1 per cent
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GETTYNearly six in ten SMEs attributed redundancies to escalating costs, including business rates and National Insurance Contributions.
Separate analysis from Begbies Traynor last week identified 67,369 companies in critical financial distress during the final quarter of 2025.
Matt Swannell, chief economic advisor to the EY Item Club, said: “The Autumn Budget saw the Government build a healthier degree of fiscal headroom, although some of the more substantial measures won’t take effect for a couple years.”
He noted that while additional tax rises may not materialise this year, previously announced measures will begin generating revenue as ministers work to reduce borrowing and maintain spending discipline.
The Bank of England is widely anticipated to hold rates at 3.75 per cent when it announces its decision on Thursday.
The EY Item Club expects one further cut in April as inflation moves towards the two per cent target by mid-year.