Unemployment in Britain is on course to climb to its highest level in five years as businesses brace for another round of tax rises under Chancellor Rachel Reeves, according to new forecasts.
KPMG said the jobless rate is expected to reach 4.9% in 2026, up from the current 4.7% and well above the 4.1% recorded in August last year, as the labour market struggles with falling vacancies. The consultancy warned that the market was “unlikely to see a reversal in fortune in the near term” amid fears the Government will tighten the squeeze on employers.
Reeves is grappling with a potential £50bn hole in the public finances caused by weak growth and costly policy U-turns. She has already overseen a record £40bn tax raid on business, including a hike in employer National Insurance contributions branded a “jobs tax”. But with her fiscal rules under pressure, speculation is mounting that she will need to go further—potentially targeting companies, landlords and investors while maintaining Labour’s pledge not to raise taxes on “working people”.
KPMG’s forecast added to concerns that Labour’s workers’ rights reforms, which strengthen union powers, could have a “chilling effect” on hiring. It expects vacancies to continue falling through the rest of the year, with many firms holding back on recruitment until there is more clarity in Reeves’s Autumn Budget in November. “As a result, we expect unemployment to gradually rise further over the coming year, increasing from 4.7% in July and peaking at 4.9% in 2026,” it said. GDP growth is forecast at 1.2% this year, slowing slightly to 1.1% in 2026.
The numbers pose a serious challenge for Reeves, who faces spiralling borrowing costs, weak productivity and accusations that Labour’s tax-and-spend policies risk choking off growth. Mel Stride, the shadow chancellor, said Reeves was “asleep at the wheel”, adding: “She now has a black hole to fill just to keep to her own rules—the rules she already rewrote to allow even more borrowing. The price? Yet more tax rises in the Autumn. More pain for working people.”
Although Reeves has rejected claims she is facing a £50bn shortfall, analysts believe tens of billions will still need to be found. Options under discussion include freezing income tax thresholds for longer, a move that could raise £8bn, and fresh levies on wealth, property and dividends. Economists have also suggested windfall taxes on gambling companies and reform of council tax bands for homes worth more than £1m.
James Nation, a former Treasury adviser under Rishi Sunak, warned that increasing capital gains tax would be “a hard political sell”. He compared it to inheritance tax in its unpopularity, saying: “You’d be saying to someone that, in theory, if you improve the state of your property, there is a world in which the taxman would be able to come and take away some of that gain.”
Despite the speculation, a Treasury spokesman insisted the Government remained “pro-business”, highlighting trade deals with the EU, US and India, reforms to business rates, and a corporation tax cap at 25%. “We are delivering on our Plan for Change to put more money in people’s pockets by increasing the national living and minimum wage, and real wages have grown more since the election than the first decade of the previous parliament,” the spokesman said.
