Households will face a barrage of bill hikes, welfare cuts and general economic turmoil over the next 12 months, but there are at least a few crumbs of comfort for hard-pressed households.
This year is set to be a difficult one financially.
While we’re already entering so-called ‘Awful April’ with its perfect storm of hikes in energy, council tax, water and other bills, unfortunately, it looks like there will be plenty more bad news to come in 2025.
We need to prepare ourselves and our finances for some tough times ahead.
However, there are also a few positive spots on the horizon to relieve the gloom.
Here are some of the financial shocks we will need to brace ourselves for as the 2025/26 financial year plays out.
1. Inflation is set to rise
After spiking in previous years following the Russian invasion of Ukraine, inflation fell to 2.8% in February this year.
However, the Office for Budget Responsibility (OBR) is now forecasting that inflation will jump to 3.7% later this year.
At the Spring Statement, the OBR warned that the economic outlook had “become more challenging since the Autumn Budget,” with domestic output stalling and business and consumer confidence falling lower.
European energy prices have risen, Government bond yields are also up and there is additional pressure to increase defence spending due to the US reducing its commitment to NATO, as well as growing global trade restrictions, it said.
2. Economic growth forecasts halved
As such, the OBR has slashed its UK growth forecasts in half from 2% to just 1% for 2025 and expects growth rates to “recover” to 1.75% over the rest of the decade.
Meanwhile, higher energy and food prices, together with higher wage growth, are to push inflation to a quarterly peak of 3.7% halfway through 2025, before falling again.
Higher Government debt interest payments and weaker-than-expected income has reduced Reeves’ £9.9 billion budget surplus to a deficit of £4.1 billion in 2029-2030, the OBR says.
However, the £14 billion in savings from welfare and departmental cuts are expected to offset this for now.
3. Pressure from trade tariffs
US President Trump’s widely publicised trade tariffs are unlikely to help matters.
America has imposed 25% tariffs on steel and aluminium imports from the UK and followed this up with 10% tariffs on items such as car imports to the US in what he has dubbed ‘Liberation Day’.
While the Labour Government is in “intensive negotiations” to strike a deal with the US, economists think Chancellor Rachel Reeves has little headroom to deal with the potential fallout from any further tariffs on British goods.
“Tariffs mean prices and costs will inevitably go up, and this is a lose-lose scenario for consumers, businesses, and economic growth,” said William Bain, head of trade policy at the British Chambers of Commerce.
4. Savings rates to fall
With inflation set to rise, you might expect the Bank of England to start raising interest rates again to tackle it.
Indeed, the Bank kept interest rates steady at 4.5% last month rather than cut them.
However, for now, the financial markets are still expecting two cuts in the Base Rate this year, bringing it down to 4%.
This means savers could be earning less on their nest eggs.
You’ll need to move your money to an account that pays an interest rate above inflation to avoid your savings losing value in real terms.
Take a look at our best value for money savings accounts for some ideas.
5. Tax rises likely
With the economy looking increasingly anaemic and the Labour Government having already inherited a £22 billion ‘black hole’ in our finances, it is looking more and more likely that the chancellor could have little choice but to raise taxes in the October Budget.
Labour has tied its hands with Reeves’ fiscal rules and election pledge not to raise taxes, giving her little wriggle room to deal with any unexpected economic pressures, but this is likely to have to change.
Paul Johnson, director of the Institute for Fiscal Studies, an economic think tank, told the BBC that there is a "good chance" economic forecasts could worsen ahead of the Budget in October, "which will likely mean raising taxes even further".
Meanwhile, Keir Starmer has not ruled out more tax hikes in the autumn.
"Obviously, I'm not going to write future budgets - every prime minister and chancellor from every government always takes that position," he said.
Which taxes might Reeves raise?
A continued freeze on the income tax bands – known as fiscal drag – looks likely. This will drag more income taxpayers into the higher rate bands as their wages rise but costs continue to increase.
Currently, the salary band at which workers begin paying 40% tax is £50,271 and this has been frozen until 2028. But Reeves could extend the freeze to 2030 or beyond.
The Chancellor is also said to be considering cutting the tax-free allowance individuals can currently save into a cash ISA from £20,000 a year to just £4,000.
Reeves confirmed recently that cash ISA terms are currently under review.
Capital Gains Tax and Inheritance Tax are other areas Reeves could tinker with.
6. Possible pensions raid
Some commentators are also concerned that there could be a future raid on tax relief on pension contributions, which is thought to cost the Treasury billions each year.
Possible options include cutting tax relief to a flat rate of 25% for all – abolishing 40% tax relief for higher earners – or cutting the annual allowance to £40,000 from £60,000.
7. Welfare cuts
Meanwhile, the Government is already targeting those on disability benefit, aimed at cutting £6 billion from the annual welfare bill.
Work and Pensions Secretary Liz Kendall has introduced reforms including making it harder to claim Personal Independence Payments (PIP), halving Universal Credit incapacity benefits and stopping those under 22 from claiming them, as well as axing work capability assessments.
The controversial cuts are already being met with some resistance from Labour MPs, as well as disability campaigners.
Four positive things to look forward to
However, on the bright side, not everything will be doom and gloom this year. There are also some positive things on the horizon.
1. State Pension increase
Good news for most pensioners is that the State Pension increased this month by 4.1% or £362.65 a year. This is inflation-beating, thanks to the triple lock guarantee.
The new full State Pension will also increase by £474.85 a year, while the Guaranteed Element of Pension Credit – an additional payment for pensioners on low incomes – has also risen by 4.1%.
Universal Credit, Child Benefit, Personal Independence Payments and Employment and Support Allowance area also set to increase by 1.7% this month.
2. Hike in the minimum wage
The minimum wage has also been raised from April this year, which could give hard-pressed workers a little more leeway to cope with the rising costs expected this year.
Pay for those aged 21 and over has risen by 6.7% to £12.21 per hour (from £11.44), meaning full-time workers will earn an additional £1,400 a year.
Those aged 18 to 20 will receive £1.40 more per hour, increasing their wages from £8.60 to £10 per hour, while 16- to 17-year-olds on an apprenticeship will see their hourly pay increase to £7.55 per hour from £6.70.
3. Energy prices to fall later this year
While the energy price cap has just increased again, energy prices are forecast to drop in the summer and remain flat for the rest of 2025.
Analysts at Cornwall Insights, for example, expect prices to drop by 7% in the period from 1 July to 30 September to around £1,712 per year for the average household.
At least this will give struggling households some respite from the recent multiple jumps in the energy price cap.
Read our article on 9 ways to cut your energy bills.
4. Mortgage rates could also fall
With two cuts in the Base Rate still pencilled in by the financial markets this year, this could be good news for homeowners on a variable or tracker mortgage, assuming lenders pass on the cut.
While other costs may rise, a fall in mortgage payments should help soften the blow.
Want to shield your household from financial shocks? Here are some money-saving tips from the experts to help reduce your costs.