Understanding the economic landscape is an important part of financial planning. Naturally, nobody can see the future, but being aware of the potential challenges you could face in the coming year means you can prepare.

Crucially, this might allow you to reduce the impact of outside factors on your financial position.

As we enter 2026, looking back over the last year may offer insight into what the future holds. Household spending is an important trend to consider as it reflects the overall health of the economy and how the average person feels about their wealth.

In 2025, household spending fell for the first time in several years.

Read on to learn what this tells us about the financial challenges you could face in 2026.

A report from Barclays found that household spending fell by 0.2% in 2025

Normally, if the economy is growing, you would expect people to be better off, and spending would likely increase.

Figures from Barclays show that this was the case in 2023 and 2024, when household spending increased by 4.1% and 1.6%, respectively.

However, in 2025, household spending fell by 0.2%. While this might seem like a minor decrease, the fact that spending is on a downward trend suggests that there are unique financial challenges which could continue into 2026.

The cost of living remains a key concern for many UK adults

One of the key reasons that household spending fell is that many of us worry about cost of living rises and lack confidence in the economy. Barclays found that only 24% of those surveyed felt optimistic about the nation’s economic strength.

To balance their budgets and protect themselves against cost of living rises, many households reduced spending on essentials, leading to a 2.3% fall in this area.

Going into 2026, the cost of living remains a key concern as the Guardian reports that by the end of last year, 58% of people said they felt the economy was worsening.

In the coming months, it’s important that you consider how cost of living rises might affect your budget and ability to save and invest for the future. Where possible, you could make adjustments to ensure you remain on track to meet important savings targets.

Fortunately, although many remain pessimistic about the cost of living, the situation may not be as bad as expected. While essential spending fell in 2025, Barclays also reported that non-essential purchases increased by 0.8%.

Fiscal drag could erode increases in your disposable income

Another reason spending may have slowed in 2025 is that consumers didn’t see their disposable income increase as much as expected, even if their earnings rose.

This could be because of fiscal drag.

In her recent Budget, chancellor Rachel Reeves announced that she was extending the freeze on the Personal Allowance and Income Tax thresholds. This means that the amount you can earn each year before paying Income Tax, and the thresholds at which you move into higher tax brackets, will remain at their current levels until at least 2030.

However, in that time, your earnings may increase. If you’re retired, you may draw a higher amount from your pension over time to maintain your current standard of living when costs rise.

This means that more of your income is pulled into a higher tax bracket and you pay more Income Tax than you would have previously, even if the rate hasn’t increased – a phenomenon known as fiscal drag.

As a result, you might not see a meaningful increase in your disposable income, even if your earnings rise. According to the BBC, forecasts suggest that average disposable income for UK adults will rise by just 0.5% a year for the next five years.

You can still achieve your financial goals despite economic challenges

Cost of living rises and the ongoing effects of fiscal drag could put pressure on your budget in 2026. Fortunately, this doesn’t mean you have to sacrifice your financial goals.

We can support you in various ways to help you adapt to these circumstances and shore up your finances.

Read more: 3 ways to build financial resilience in 2026

For instance, we may discuss options for mitigating a large Income Tax bill, such as increasing your pension contributions, to help combat fiscal drag.

Additionally, by managing your investment portfolio and giving you guidance about your savings, we can help you consistently grow your wealth. This means that, despite economic challenges you might face in 2026, you can still improve your financial position.

Get in touch

We are here to guide you through your financial decisions in 2026.

Please contact us at hello@ardentukstg.wpenginepowered.com or call or WhatsApp us on 01904 655 330. As an award-winning financial advice company with advisers included in the 2025 VouchedFor Top Rated guide, we can assure you that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.