The UK economy is set to lose momentum next year, with unemployment expected to rise, according to new analysis published in the wake of the Autumn Budget.

Forecasts from KPMG suggest GDP growth will slow to 1% in 2026, down from 1.4% this year, as household budgets face continued pressure and businesses recalibrate hiring plans.

The outlook follows chancellor Rachel Reeves’ decision to freeze income tax thresholds for another three years, a move designed to raise an additional £28m for the Government.

The budget revealed national insurance rates for salary-sacrifice pension schemes will also increase, adding further cost for employers and workers.

KPMG said the measures would contribute to ongoing “fiscal drag”, pushing more people into higher tax brackets over time.

Meanwhile, KPMG chief economist Yael Selfin warned consumer spending is likely to remain under strain throughout next year, noting the Budget had avoided large upfront tax rises but did not significantly ease pressures on disposable income.

The firm expects unemployment to climb to 5.2% in 2026, driven partly by more people re-entering the labour market after long periods of inactivity, while a slowdown in private-sector hiring, combined with the growing use of automation and AI across industries, is also expected to weigh on job creation.

Looking ahead, despite the weaker short-term picture, KPMG predicts the economy will regain pace from 2027, forecasting GDP growth of 1.4%.

Selfin said there were “pockets of strength” emerging across the economy, particularly in green energy and digital infrastructure, adding that progress on planning reform and better clarity for investors could help lift the medium-term outlook.

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