Reliable financial predictions for 2026 don't paint a pretty picture: Sarah Coles

The good news is there are some predictions that are much more reliable than this. The bad news is that not all of them paint a terribly optimistic picture of the coming year.

Brace yourself, because there’s a reasonable chance you’ll pay more income tax. The rate on wages may not have changed, but income tax and National Insurance thresholds are frozen until 2031, so every pay rise risks pushing more people over the personal allowance or into paying higher or additional rate tax.

You might think you’re safe from a bigger tax bill, because wage inflation is set to fall in the coming year. However, even if your wages aren’t growing fast enough to keep up with inflation, you’ll still pay more tax. At the moment, wage growth in the finance and business services sector is 2.3 per cent, and in construction it’s 2.9 per cent.

In both cases, you’re worse off once inflation is factored in, and yet people are still being pushed over thresholds into paying income tax, or paying a higher rate.

When you cross a threshold, it’s not just more income tax you have to worry about, but potentially higher rates on everything from dividend tax to capital gains tax, and a shrinking personal savings allowance. If you move tax brackets, it will be particularly important to consider how to cut your tax bill – including using cash ISAs and pension contributions.

Dividend tax itself will rise, on anything over £500 on investments held outside ISAs and pensions.

In April, the rate of dividend tax will rise from 8.75 per cent to 10.75 per cent for basic rate taxpayers, and from 33.75 per cent to 35.75 per cent for higher rate taxpayers. It’s a nasty tax hit for income investors, who have already been hit with a succession of horrible cuts in the annual dividend allowance and a separate hike back in 2022.

For some people, paying more tax on higher incomes would be a nice problem to have, because their fear in 2026 is related to their job. Already, we have seen unemployment rise and vacancies fall, and there may well be more of the same next year.

The unemployment rate has risen to 5.1 per cent and the Bank of England says it could rise to 5.5 per cent. Depending on the progress of AI and the continued rush to take layers of management out of organisations, things could get worse – particularly for entry-level positions and middle management. This could be the year that job-related uncertainty touches your finances.

It's why it’s such a sensible idea to consider your emergency savings safety net sooner rather than later. Having enough cash to cover 3-6 months’ worth of essential expenses while you’re working will give you vital breathing space if you lose work.

Fortunately, savings are something of a bright spot for 2026. The HL Savings and Resilience Barometer suggests that the easing of inflation is likely to mean households save more, so by the middle of the year, on average, they will have enough savings to cover 3.5 months of essential spending – up from 3.3 months in 2025.

There’s a strong chance that much of the additional saving will be in cash ISAs, in the wake of the government’s announcement that the cash ISA allowance will fall to £12,000 for under 65s from 2027. Savers may want to take advantage while they can.

Unfortunately, some of those savings could attract less interest in the coming year.

Inflation has already fallen faster than the Bank of England expected, and when added to the impact of a tougher employment market and sluggish economic growth, it means the Bank of England is likely to cut interest rates.

However, these aren’t likely to be anywhere near as regular as they have been in 2025, and many economists suggest they might settle at 3.25 per cent.

In this kind of environment, it will be important to make sure your money is in the most sensible home for your needs.

If you need it for emergencies, an easy access cash savings account is the most sensible home. If you don’t need it for a period, you may want a fixed rate savings account, where you tie it up in return for a guaranteed rate for the length of the fix. Meanwhile, if you have 5-10 years or more until you’re likely to need the money, you might want to consider a stocks and shares ISA.

If you were going to forecast what’s likely to happen to investments over the next year, you’d be on reasonably safe ground forecasting volatility and uncertainty. It’s going to be the kind of market where you’ll be glad of a diverse portfolio and a longer time horizon.

A year is going to feel like a long time when you’re living through it, but in investment terms, it’s the blink of an eye.

Of course, in reality, how your year looks will be specific to you. Whether your budget gets tighter or more generous will depend in part on whether you have had a pay rise, and whether you spend more or less of your income on the things that are rising more quickly in price. It will also vary depending on whether you’re working or drawing a pension.

Pensioners will get a boost in April, with the state pension rising 4.8 per cent in line with the triple lock. This will help ensure their purchasing power keeps up with prices, which will lessen the strain on their budgets.

Of course, for those who are also taking money from a level annuity, their annuity income will lose spending power after inflation, so what you gain on one hand you may lose on the other.

You can’t be expected to forecast exactly how your year will look. The best you can do is protect yourself against tax attacks and risks to your income, and plan ahead so you can handle whatever the year throws at you.

If it seems like I’m sitting on the fence, so you can’t come back to me in 12 months and demand to know why I didn’t forecast the alien invasion or the rise of the machines, you may be onto something. I couldn’t possibly comment.

Can your Christmas gifts save inheritance tax?

If you’re worried about inheritance tax, and want to give money during your lifetime, you might think you’re limited to giving away gifts within a fairly tight annual allowance, but there is a useful alternative, and Christmas is a great time to use it.

There’s a specific rule which allows regular gifts made from your ‘surplus income’, which fall straight out of your estate immediately. You don’t need to make the gift direct to the individual. You can pay into a Junior ISA for children, which they can access when they turn 18.

In order to qualify, there are some conditions you have to meet. You have to be able to maintain your normal standard of living after making the gift, and avoid dipping into savings or investments to afford it. The gift must come from actual income. This can be from employment or self-employment, pensions, rent, interest or dividends.

What’s key at this time of year is that you also need to establish a clear, regular pattern of gifts – like Christmas gifts. Past cases have shown that even if you pass away before next Christmas, if you put the right things in place, one gift can count as the first in a regular series.