Adam Pilanc from Step by Step Financial Solutions exploring the latest market and property trends influencing the UK economy in 2025.
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Overview of the UK Economy in 2025
The UK economy in 2025 presents a mixed picture of challenges and opportunities. According to Adam Pilanc from Step by Step Financial Solutions, the cumulative GDP growth over the past five years stands at a modest 3.4%. This slow growth is compounded by a significant tax increase of £40 billion in 2024, with more anticipated in the current year. The Office of Budget Responsibility has adjusted its growth forecast for 2025 to 1%, down from an optimistic 2% predicted last year.
The economic outlook remains cautious, with the government aiming for a 2% growth rate by 2026. This cautious stance is influenced by various factors including inflation, tax policies, and market dynamics. Yet, there are glimmers of hope as businesses and consumers navigate this complex economic landscape.
Key Tax Changes and Their Implications
Several significant tax changes are set to impact individuals and businesses in 2025. Council tax is set to rise by 5%, pushing the average household bill over £2,200. Car taxes are also increasing, particularly for vehicles with high CO2 emissions. For instance, buyers of cars emitting over 255 grams of CO2 per kilometre will face a doubled tax in the first year.
Capital gains tax is another area seeing substantial changes. The tax rate is increasing from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate taxpayers. This means that selling a second property with a £50,000 profit could result in an additional £4,000 in taxes for higher rate taxpayers.
Additionally, the income tax threshold is frozen until 2028, pushing more people into higher tax brackets as wages grow. This freeze, combined with the removal of interest rate relief on London properties, presents a challenging environment for many taxpayers.
Projected Inflation and Economic Growth
Inflation is expected to rise to 3.7% by late summer 2025. This increase is driven by higher council taxes, utility bills, and other factors. Historically, the annual inflation rate measured by the Consumer Price Index was 2.8% in February, down from 3% in January. The Office of Budget Responsibility expects inflation to stabilise around 2.7% in Q2 and Q3 of 2025.
Despite the inflationary pressures, wage growth is a positive sign, with wages finally catching up to and even exceeding inflation. This wage growth is crucial for maintaining consumer spending and economic stability. However, potential external factors such as tariffs from international trade policies could still pose risks to the inflation outlook.
Trends in the UK Property Market
The UK property market has shown resilience in Q1 2025. Demand for larger properties has driven price growth, with the average house price reaching £294,818. Terrace houses have seen a 4.5% increase, while flats lag due to new fire safety regulations.
Regionally, the northeast and Northern Ireland have experienced the largest annual increases at 8.4% and 15.2%, respectively. Despite a slight dip in February, the annual growth rate remains at 2.9%. This stability is supported by a more stable mortgage market, with interest rates levelling off from the high rates seen in previous years.
The end of the stamp duty holiday has also spurred significant market activity, with a 92% increase in moving volumes in the last week of Q1. This rush to beat the stamp duty deadline has put pressure on solicitors and mortgage lenders, reflecting the continued high demand in the property market.
Impact of New Regulations on Landlords and Tenants
New regulations are set to significantly impact landlords and tenants in 2025. The abolition of no-fault evictions (Section 21) aims to provide greater security for tenants. While this change is beneficial for tenants, landlords may find it more challenging to reclaim their properties.
The introduction of a private rental sector database is another key development. This database will hold landlords accountable and is expected to benefit good landlords by creating a more transparent rental market.
However, the increased regulatory burden and rising costs may deter some landlords from staying in the market. This could exacerbate the shortage of rental properties, further driving up rents. As of December 2024, the average rent for new lets in the UK was £1,284 per month, with affordability becoming a growing concern for tenants.
Opportunities and Challenges for Investors
The current economic landscape presents both opportunities and challenges for investors. The rising rents and property prices make the UK property market an attractive investment. However, investors must navigate the increased tax burden and regulatory changes.
For those willing to adapt, there are opportunities to acquire properties at negotiated prices. The market currently favours buyers, with more choices available than in previous years. Investors can also consider structuring their investments through limited companies, which offers potential tax benefits and greater flexibility.
Despite the challenges, the market remains dynamic, and proactive investors can find lucrative opportunities. Staying informed and strategic planning are crucial for navigating this evolving landscape and maximising returns.
