Spending Review 2025: HL experts highlight key points advisers need to watch out for in next week’s big government announcement

With the Chancellor’s long-awaited Spending Review set to be unveiled next Wednesday,11th June, financial advisers should be alert to the possible implications for clients and financial planning strategies.

Major government spending commitments – from defence to public sector pay – have already been made, while pressure is mounting on welfare and pension support. Against this backdrop, the Chancellor faces a tough balancing act, made harder by rising debt servicing costs and limited fiscal headroom.

Looking ahead, this all means that for her Autumn Budget, Rachel Reeves might well be facing some difficult choices – from spending cuts to tax rises, or a potential loosening of fiscal rules. In this article, experts from Hargreaves Lansdown explore the key points advisers should watch out for and what the upcoming decisions could mean for pension planning, investment strategies and client tax exposure.

Giving her analysis of the government’s overall fiscal position and the possible impacts on the UK economy and markets, Susannah Streeter, head of money and markets, Hargreaves Lansdown, said:

“As the Spending Review approaches, the Chancellor’s fiscal juggling act has become even more tricky. There are multiple balls of pledges to be kept up in the air – from defence, to pay demands and relief for families and pensioners.

This week, faced with the increased threat from Russia and unreliability of US support, the government has pledged to ensure UK armed forces are combat ready. The ramp up in defence spending to 3% by 2034 is expected to cost around £17 billion annually. Then there’s the commitment to give public sector workers in England a pay hike of 3-5% in 2025/26, rather than 2.8% as the Chancellor had originally planned for – and that’s set to cost an extra £2-3 billion. The government is also grappling with the promise to restore more winter fuel payments to pensioners and is also under political pressure to remove the two-child cap on benefits.

As well as attempting to juggle more spending demands, the cost of borrowing has also risen, and the Chancellor is walking the tightrope of dealing with higher debt repayments. Given the rise in gilt yields since the March Spring Statement, it’s estimated that £4.4 billion more will be needed to service interest payments by 2030.

Even though the path looks precarious, the Chancellor remains committed to maintaining stability and prudence with borrowing to avoid a bond market strop out. So, given big cuts in other departments would be politically difficult, it is not surprising given the choices in the Spending review that speculation is mounting about potential tax rises in the Autumn.

However, there could still be another escape route from being forced into a big retreat from the election pledge not to raise income taxes. There is a chance that Rachel Reeves might tweak her fiscal reporting rules, as suggested by the International Monetary fund. This has the potential to give the Chancellor a bit more wiggle room as the government might not be forced to make such frequent spending changes in reaction to changes to the economic outlook, which as we know is currently in a state of flux due to the unpredictability of US trade policy.”

In terms of possible impacts on pensions and retirees, Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said:

“The government’s announcement that it would revisit its decision to restrict Winter Fuel Allowance has been greeted with a sigh of relief from pensioners. However, for now detail is scant as to what any tweaks could look like.

Speculation over tax changes could raise worries for people’s pensions. There are questions around the future of salary sacrifice schemes for workplace pensions. This would cut the tax-efficiency of these schemes, which runs the risk of persuading employers to make their pension offering less generous. There has also been discussion about the reinstatement of a pension lifetime allowance, which risks undermining people’s confidence and encourage them to pause contributions.”

On possible tax rises, Sarah Coles, head of personal finance, Hargreaves Lansdown said:

“If a potential funding gap emerges, there’s going to be speculation that taxes could be hiked to close it. The government very broadly has two options when it comes to fund raising from taxes. It could make a whole host of smaller tax tweaks – all of which could cause their own problems, or it could tackle a major tax, which would be politically risky.

As well as the threat of thorny pension tax changes, there are questions around dividend tax. Investors have already seen horrible cuts in the dividend allowance and higher rates introduced, so it would be adding insult to injury. Given how attractive the UK market is for investors seeking dividends, it would be counter-intuitive to make dividend investing less rewarding given that the government is keen to encourage investment in the UK.

Inheritance tax could also be in the frame again. The government could, for example, tweak the rule which means that gifts of any size can be given to anyone, and as long as you live for another seven years, it’s out of your estate for inheritance tax purposes. However, it will have seen the potential backlash from touching the UK’s most hated tax and understand the risks of doing it again.

One easier option might be to freeze income tax thresholds until 2030, on the grounds it’s not a tax rise. The problem is that this will raise money in future years – beyond 2028 – so won’t help in balancing the books in the interim.

Instead of making multiple tweaks, the government might consider the option of U-turning on its election pledges, and make a small change to a big tax – like income tax, National Insurance or VAT. This would be politically incredibly difficult, but the government might decide in a world with no good options, it could be worth the backlash in order to put the finances on a firmer footing.”