Author: Glenn

As we look ahead to 2026, there is growing speculation about how the Bank of England will manage interest rates during what many economists believe will be a period of calmer inflation, steadier wage growth and a more predictable economic backdrop. After several years shaped by sharp price rises, supply chain shocks and policy responses that required rapid increases to the Bank Rate, the outlook for the coming year appears more settled and this is creating a sense that borrowing costs may edge downwards rather than upwards.

The current Bank Rate stands at around four per cent following a series of cuts through 2024 and 2025 as inflation eased gradually. Policymakers have indicated that they remain alert to any resurgence in inflationary pressure, yet they also recognise that the period of high inflation is now behind us. If this trend continues and inflation drifts closer to the Bank’s long term target, it will give the Monetary Policy Committee more room to make modest reductions during 2026. Many forecasters expect something in the region of a quarter to half a percentage point of cuts during the year, although the timing will depend heavily on the data released each quarter.

For households and businesses, this would create a slightly more comfortable lending environment. Mortgage borrowers on variable deals may feel some relief as repayments fall a little and businesses that rely on flexible credit facilities could find that their financing costs ease. Fixed mortgage rates may also become more attractive if lenders anticipate further gradual reductions. However, the broader economic impact is unlikely to be dramatic, since the Bank is not expected to deliver large or rapid cuts. The emphasis is more likely to remain on steady adjustments that avoid disrupting confidence or encouraging excessive borrowing.

It is worth noting that a full return to the ultra-low interest rate environment seen before the pandemic is not expected. Structural changes in the UK economy, global supply conditions and the government’s fiscal position all point towards a future in which interest rates remain higher than the levels seen in the decade prior to 2020. Even so, a move towards slightly lower borrowing costs in 2026 would be consistent with a maturing recovery and a gradual balancing of supply and demand across the economy.

Overall, the most probable outcome for 2026 is a measured reduction in interest rates that supports economic stability without risking a renewed surge in inflation.

Food and energy costs remain central concerns for households and businesses because they influence everything from wages to margins to day to day operating decisions. Inflation is easing compared to the volatility of the last few years, but the picture for the next twelve months is still mixed. Prices appear set to rise more slowly, yet neither category is likely to fall in any meaningful way.

Food price outlook

Food prices surged during the supply chain disruptions of 2021 to 2023 and were pushed higher again by wage pressures, transport costs and global shipping instability. Although the pace of increase has slowed during the past year, prices remain high. Many clients still question why food costs have not dropped as headline inflation falls. The reason is that the underlying conditions that drove those increases have not disappeared. Agriculture, food production, and distribution still face labour shortages, higher input costs, and ongoing uncertainty in global trade routes.

The most likely outcome for the coming year is a gradual easing in the rate of food inflation rather than a reduction in prices. Supermarkets report calmer supply chains and producers appear more willing to absorb cost pressures in order to protect sales volumes. Better harvests in some regions and lower freight costs should also help. These factors together should keep the next year more stable than the recent past.

Energy price outlook

Energy prices have been among the most unpredictable elements of the recent inflation cycle. While the extreme spikes have eased, the underlying global influences remain. The UK is particularly exposed because it relies heavily on imported gas and is tied to international pricing. Global gas markets continue to react to geopolitical tensions, shipping disruptions and variations in European storage levels. These variables explain why energy pricing still carries a degree of uncertainty.

However, the direction for next year looks a little steadier.

What this means for business planning

The next year is unlikely to bring substantial falls in food or energy prices, but the environment should feel less pressured. This increased stability provides an opportunity for better budgeting and more confident forecasting. Hospitality businesses and manufacturers may find it easier to plan pricing strategies, menus and supply arrangements. Broader stability also supports decisions on energy efficiency projects since assumptions about future savings appear more reliable.

The Chancellor has kept the main pension allowances unchanged but has confirmed a new cap on salary sacrifice arrangements that will apply from April 2029.

There had been heated speculation that the Chancellor would change the pension rules to help the government raise taxes, but no changes were announced to the annual allowance (which remains at £60,000) or to the carry-forward rules which can use up previous year’s annual allowances. The lump sum allowance has also remained unchanged at £268,275.

However, the Chancellor announced changes to the salary sacrifice arrangements for pension contributions. Salary sacrifice allows employees to reduce part of their salary or bonus in exchange for pension contributions, which is tax-efficient and helps save for retirement. However, this arrangement has disproportionately benefited higher earners with salary sacrifice costs expected to rise from £2.8 billion in 2016-17 to £8 billion by 2030-31.

From April 2029, the government plans to introduce a cap on salary sacrifice contributions which will limit the amount that can be sacrificed without incurring National Insurance Contributions (NICs) to £2,000 per employee. Salary sacrifice contributions above this amount will be subject to employer and employee NICs. Pension contributions that are not part of a salary sacrifice will remain unchanged.

The Chancellor reaffirmed the government's commitment to maintaining the Triple Lock on the State Pension throughout this parliament. This means that in April 2026, the State Pension will increase by 4.8%. The Triple Lock ensures that the State Pension rises by the highest of three measures: inflation, wage growth, or 2.5%, helping to protect pensioners' income against rising costs of living.

Also, starting from 6 April 2027, the government will close a loophole that allows individuals to use pensions for inheritance tax (IHT) planning. Under the new rules, any unspent pension pots will be brought within the scope of IHT.

Starting in 2028-29, the government will introduce a High Value Council Tax Surcharge (HVCTS) for residential properties in England valued at £2 million or more. This surcharge will be collected by local authorities, but the revenue will go to central government.

High Value Council Tax Surcharge Charging Structure

The surcharge amounts will be based on the value of the residential property in 2026. The surcharge will increase as the property value rises, up to a maximum charge of £7,500 for properties valued over £5 million.

According to HM Treasury figures, the surcharge will apply to fewer than 1% of properties in England. Homeowners, not tenants, will be liable for the surcharge, which will be in addition to their existing Council Tax. Social housing will be excluded.

Properties above the £2 million threshold will be reassessed every five years by the Valuation Office. The surcharge rates will increase annually in line with CPI inflation starting in 2029-30.

This new charge is expected to raise around £430 million annually for local government services. Local authorities will be compensated for the additional costs of administering the surcharge. A public consultation on further details, including reliefs and exemptions, will take place next year.

The Chancellor of the Exchequer, Rachel Reeves announced increases to the Minimum Wage rates on the eve of the Budget. The Chancellor confirmed that the government has accepted in full the proposals of the Low Pay Commission (LPC) for increasing minimum wage rates from 1 April 2026.

The National Living Wage (NLW) rate will increase from £12.21 to £12.71 on 1 April 2026 and represents an increase of 50p or 4.1%. The NLW is the minimum hourly rate that must be paid to those aged 21 or over. The increase represents a pay rise of £900 a year for someone working full-time and earning the NLW.

It was also announced that the National Minimum Wage (NMW) – for 18-20 year olds – will increase from £10.00 to £10.85 an hour. This is an 8.5% increase and will see younger workers having their pay boosted by up to £1,500 next year. This increase is part of moves to narrow the gap in wage rates for 18-20 years olds and the NLW and ultimately create a single adult wage rate for all those aged 18 and up.

The NMW rates for 16 to 17 years old will increase from £7.55 to £8.00 – an increase of 45p or 6% per hour – from next April. The Apprentice Rate will mirror this increase in line with earlier recommendations by the LPC.

At the Budget, the government also announced two new measures aimed at supporting young people’s employment and skills development.

1. The Youth Guarantee: Jobs Guarantee Scheme will provide a six-month paid work placement for eligible 18-21 year group, who have been on Universal Credit and searching for work for at least 18 months. This scheme will cover 100% of employment costs for 25 hours a week at the minimum wage, alongside other support measures.
2. The Youth Guarantee and Growth and Skills Levy will allocate more than £1.5 billion over the spending review period to improve employment and skills support. This funding will help ensure that young people have access to high-quality training opportunities and streamline the apprenticeship system to make it more efficient.