Spend now, tax later? Chancellor Rachel Reeves has delivered her Spending Review.

Chancellor Rachel Reeves's first major spending review is a delicate balancing act. For individuals, it promises the tangible benefit of revitalised public services, yet it introduces subtle but significant shifts in the tax landscape that demand immediate attention. The changes to Inheritance Tax on pensions, in particular, represent a fundamental rewrite of retirement planning rules. Now, more than ever, a proactive approach to personal financial management is not just advisable; it is essential for securing your financial future in this new era of public spending.

London, UK – June 11, 2025 – Chancellor of the Exchequer Rachel Reeves has unveiled a landmark spending review, setting a new course for the UK’s public finances. With major investments in the NHS, housing, and defence, the plan signals a clear shift in government priorities. But beyond the headline figures, what does this mean for your personal finances, your long-term retirement goals, and your day-to-day budget? This article delves into the financial implications for the average person and offers guidance on how to navigate the changes.

 

Key Takeaways

 

  • For Your Budget: Expect improved public services like healthcare and transport, with the £3 bus fare cap extended in England. However, be mindful of potential cuts to local council services. The freeze on some tax thresholds could mean you pay more tax as your income rises (“fiscal drag”).
  • For Your Savings & Investments: The government’s focus on infrastructure and technology, including AI and green energy, may create new investment opportunities. However, an increase in Capital Gains Tax could affect returns for investors.
  • For Your Retirement: The biggest change is the inclusion of pensions in Inheritance Tax (IHT) estates from April 2027. This requires an urgent review of your retirement and estate planning. The state pension itself sees no immediate changes, but the long-term funding of public services could have future implications.
  • How It’s Funded: The plan is paid for by a combination of higher borrowing, targeted tax rises (on non-doms, capital gains, private school fees), and increased National Insurance contributions from employers.

The Spending Plan's Impact on Your Personal Finances

While the Chancellor’s speech focused on national renewal, the policies will have a direct and varied impact on household finances across the country.

Budgeting in the New Era: The most immediate effects will be felt in your daily budget. The significant cash injection into the NHS could lead to reduced waiting times and better access to care, potentially lowering healthcare-related costs for some. The extension of the £3 bus fare cap in England and investment in local transport will help manage commuting expenses. Families with children on Universal Credit will benefit from the expansion of free school meals.

However, the picture is not universally positive. While health and defence are protected, “unprotected” departments like local government may face real-terms budget cuts. This could trickle down into reduced local services, from library hours to road maintenance. Furthermore, the freeze on some personal tax thresholds creates “fiscal drag,” meaning a pay rise could push you into a higher tax bracket, increasing your tax bill even if headline rates remain unchanged.

 

Financial Considerations:

 

  • Review Your Budget: Re-evaluate your monthly income and outgoings. Factor in potential savings from transport caps but also be aware of possible increases in council tax or charges for local services.
  • Maximise Allowances: Ensure you are using all available tax-free allowances to mitigate the impact of fiscal drag.
  • Build an Emergency Fund: With potential for economic volatility, having a cash buffer of 3-6 months’ worth of living expenses is more crucial than ever.

Rethinking Retirement and Estate Planning

The most significant change for long-term financial planning comes in the realm of pensions and Inheritance Tax (IHT).

From April 2027, pension pots will be included as part of an individual’s estate for IHT purposes. This reverses the long-held principle that pensions were one of the most tax-efficient ways to pass on wealth.

 

Financial Considerations:

 

  • Urgent Pension Review: If you have a significant pension pot, you must review your strategy. Previously, it often made sense to spend other assets (like ISAs) first in retirement to preserve the IHT-free pension. This may no longer be the most effective approach.
  • Explore Gifting and Trusts: Consider using your annual gifting allowances to reduce the value of your estate over time. Setting up trusts could also be a viable option to manage potential IHT liabilities.
  • Seek Professional Advice: The complexity of these changes makes it imperative to consult a qualified financial advisor. They can provide personalised advice based on your specific circumstances, helping you to restructure your estate plan in the most tax-efficient way.
  • Life Insurance: Consider whether a life insurance policy written into trust could be used to cover a future IHT bill, ensuring your beneficiaries do not have to sell assets to pay the tax.

Savings and Investment Strategies

The Chancellor has signalled a clear intent to boost investment in UK infrastructure, technology, and green energy, with billions allocated to Northern Powerhouse Rail, Sizewell C nuclear power, and AI research.

This could open up new opportunities for savvy investors. However, the announced increase in Capital Gains Tax will mean that profits from selling investments will be taxed more heavily, reducing net returns.

 

Financial Considerations:

 

  • Diversify Your Portfolio: Don’t put all your eggs in one basket. A diversified portfolio across different asset classes and geographical regions remains a cornerstone of sound investment strategy.
  • Utilise Tax-Efficient Wrappers: Make full use of your ISA and pension allowances. Investments held within these wrappers grow free from Capital Gains Tax.
  • Review Your Risk Profile: The government’s spending plans are predicated on economic growth. If this fails to materialise, market volatility could increase. Ensure your investment portfolio aligns with your risk tolerance.

Author:

Andrew Rankin BA (Hons), DipPFS

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Risk Warnings:

 

Economic Forecasts: The government’s spending plans are based on forecasts from the Office for Budget Responsibility (OBR). These are projections, not certainties. If economic growth is weaker than forecast, the government may need to implement further tax rises or spending cuts to meet its fiscal rules.

Market Volatility: Changes in government spending, taxation, and borrowing can lead to market volatility. The value of investments can go down as well as up, and you may get back less than you invested.

Personal Circumstances: This article provides general guidance and should not be considered financial advice. The impact of the budget will vary depending on your individual circumstances, including your income, savings, and family situation.

Tax Rules Can Change: The tax rules outlined are based on our current understanding of the announcements. Tax law is complex and subject to change in future budgets. It is essential to seek professional, personalised advice.

Stay ahead of the changes. A small amount of planning today can make a big difference to your financial security tomorrow. Start the conversation about your finances now.

 

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