(full disclosure, I work for a hosting company)
Cheap hosting is a risky business, search engines can demote sites if they aren't available when they come to spider your pages - I've seen this happen many a time with my freelance clients
With hosting, you very often get what you pay for - occasionally you may find a small company that offers great service for low prices, but they often suffer from growing pains later on, resulting in them suddenly not being so great (I've been stung by this myself).
I'm don't think Search engines worry to much about where the site is hosted these days, they work out the target country from your domain extension but also usually give you a way to specify the target country if they're not sure (for instance, in Google Webmaster Tools).
I suppose the main benefit to UK hosting is that visitors to your site see less lag when loading the pages (if they're from the UK that is!).
Lately, I've been hosting some of my sites with a company in the states called Slicehost. Their prices are really cheap (from £12 a month for a VPS!), however you get a blank Linux box with the distro of your choice so you have to install the webserver, and any languages you want to support yourself. That said, their support is awesome and they have loads of great tutorials that talk you through every aspect of getting setup.
If you have the time to learn how to do the server admin stuff (or enjoy a challenge), you can have a reliable box that you can upgrade as you see fit, with unlimited domains and only has what you need installed. This means the boxes run much faster than your average virtual hosting account and when you run out of resources, upgrading is really easy.
Anyway, that's just my two pennies worth
Andy