UK Economic Update: The Budget, Growth, and Energy Bills

The Budget introduced several changes that could shape household finances in the year ahead, the OBR published a fresh set of growth forecasts that paint a cooler outlook for the UK economy, and an unexpected rise in the energy price cap is set to nudge bills higher from January. In this edition, we break down each of these developments.

The 2025 Budget confirmed several major tax and fiscal changes. While not all measures hit the headlines the same way, some will affect day-to-day household finances more than others. Here’s a ranked look at what matters most, from direct take-home pay effects to long-term structural impacts.

1. Freeze on personal tax and National Insurance thresholds. The 2025 Budget extends frozen thresholds (personal allowance, higher-rate limits, NIC thresholds) until 2030–31. This means that even modest pay rises will push more people into higher income tax or NI bands through fiscal drag. The government estimates this freeze alone will raise around £8.3 billion by 2029–30. (OBR)

2. Higher taxes on investment, savings, dividend and property income. From April 2026, dividend tax rates increase by 2 percentage points; similar surcharges will apply to savings and property income from 2027. For those relying on passive income, from rental properties, dividends, or savings interest, this will reduce after-tax returns, which potentially discourages saving or investment.

3. Changes affecting pension-sacrifice schemes. The Budget includes a plan to charge National Insurance on salary sacrificed pension contributions, a move projected to raise significant revenue over time. For anyone using pension sacrifice to cut tax or NI, this dilutes one of the main benefits, increasing lifetime costs of retirement saving.

4. The introduction of a new surcharge on homes valued above £2 million. From April 2028, properties that fall into this bracket will face an additional annual charge on top of standard council tax. For people owning or buying very expensive homes, this adds a recurring cost on top of existing council tax. While this only directly affects a minority, it matters for asset-rich households. It signals that property wealth may no longer be as tax advantageous as before, and may influence decisions around owning, selling, or downsizing expensive properties.

The latest forecasts from the Office for Budget Responsibility paint a more subdued picture of the UK economy over the next few years. In its November 2025 Economic and Fiscal Outlook, the OBR lowered its projections for real GDP growth across the entire forecast period. Growth is now expected to average around 1.5% a year between 2026 and 2029, down from earlier expectations closer to 1.8%.

A large part of this downgrade comes from weaker productivity assumptions. The OBR now expects productivity growth of roughly 1.0% a year, instead of the higher figures it had previously forecast. This matters because productivity underpins long-run wage growth and living standards. Slower productivity growth typically leads to slower real income gains, something the OBR explicitly highlights in its projections for household disposable income. Even by 2031, real income per person is expected to be only modestly higher than before the pandemic, suggesting a prolonged period of stagnation.

This weaker growth outlook also affects public finances. Lower productivity and slower trend growth reduce future tax revenues, making it harder for the government to expand spending on public services without raising taxes or borrowing more. The fiscal headroom that future chancellors will have to work with is therefore smaller than before, meaning spending decisions in areas like health, education, and local government may remain constrained.

For households, wage growth is likely to remain modest, inflation may come down but not quickly enough to offset years of pressure, and fiscal policy is unlikely to offer major relief. The OBR’s downgrade reinforces a broader theme of the past decade, steady but unspectacular growth.

From January, households in Great Britain will see a small but notable increase in their energy bills. Ofgem has confirmed that the Default Tariff Price Cap, which sets the maximum unit price for customers on standard variable tariffs, will rise by 0.2% for the period January to March 2026. This takes the typical annual dual-fuel bill for a household paying by direct debit to £1,758, around £3 higher than the current level.

The increase is minimal in cash terms, but it’s an important signal of the pressures still sitting beneath the surface. While wholesale gas and electricity prices have stabilised compared with the peaks seen in 2022–23, the other components of bills, like government policy costs (renewable energy subsidies, decarbonisation funds) and infrastructure costs continue to rise. These costs form a substantial portion of today’s energy bills and are expected to keep upward pressure on prices even when global markets are more stable.

This adjustment also comes at a time when many households are already managing higher mortgage costs, frozen tax thresholds, and limited wage growth. Even a small rise can add to the sense that living costs aren’t easing as quickly as people hoped. For lower-income households or those living in poorly insulated homes, heating over winter remains a significant budget strain.

UK energy bills are unlikely to return to pre-crisis levels. With infrastructure upgrades, decarbonisation investments, and network improvements continuing, the baseline cost of energy is structurally higher than it was a decade ago. It’s a good moment to assess your energy tariff (especially if you’re on a default rate), consider locking in a fixed-rate deal, or explore ways to reduce energy use, through home efficiency, insulation, or smarter usage.

Debt Interest – This is the amount the government pays each year to service its existing debt, like interest on a household loan. It rises when government borrowing increases or when government bond yields rise. A larger debt-interest bill leaves less room for spending on public services or tax cuts.

Growth Forecasts – Projections of how much the economy is expected to expand in future years. Bodies like the OBR use data on employment, investment and productivity to estimate GDP growth. Lower forecasts usually mean weaker tax revenues and tighter public finances.

Price Cap – The energy price cap sets the maximum amount suppliers can charge a typical household for gas and electricity. It’s updated every three months by Ofgem to reflect wholesale energy costs and government policy decisions. When the cap rises, bills tend to increase; when it falls, households get some relief.

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