If you can only afford a small step up the housing ladder then extension maybe the way forward but it's tweaking what you've got so may still want to move in a few years anyway. Guessing you're in a lower stamp duty bracket so moving isn't so pricey really.
I extended and renovated my previous house – gave me a big kitchen instead od the 6'x7' that was there originally and really compromised living in the house; probably made it easier to sell when I did move.