2025: The UK Economy & Your Financial Plan
What might happen to the UK economy in 2025? What could it mean for your finances, and how can you prepare your financial plan?
It is impossible to predict what will happen, but we can make educated forecasts based on what is happening, current trends and official studies.
Below, our financial advisers look at the data and discuss the possible implications for financial planning in 2025.
The Tax Landscape
Currently, UK tax revenue is the highest it has been since 1948. In the 2010s, tax revenue as a share of national income was relatively stable, at 33%. It now stands at 36% and could rise further.
In November 2024, the Chancellor (Rachel Reeves) raised capital gains tax, announced a rise in employer National Insurance rates to 15%, and laid out plans to reduce/scrap various inheritance tax reliefs (e.g. Business Relief).
Unfortunately, the UK economy is still in a difficult state. The national debt now stands at nearly 100% of GDP, and debt interest spending now exceeds £104.9 billion (8.2% of total spending, based on 2024-25 figures). If the trend continues, the national debt will increase to 270% of GDP by the mid-2070s.
Balancing the books requires cutting spending, raising taxes or a combination of the two. The former is politically costly, especially for a Labour government which has built a brand opposing austerity. Specific tax rises may be more palatable, and pundits are speculating on possible areas where the Chancellor could raise taxes further in 2025-26.
It is important not to lay too much store on these predictions. However, it helps to be aware of the Chancellor’s main options so you can adapt later (if required). Possibilities include:
- An extension to the freeze in income tax thresholds beyond 2028.
- Reversing the National Insurance (NI) cuts introduced under the last government.
- Changing ISAs – e.g. the Cash ISA limit or Lifetime ISAs.
- Reforming pension tax relief – e.g. introducing a flat rate.
With the Prime Minister recently committing to a rise in defence spending to support Ukraine, the public finances will come under greater pressure.
In short, tax rises are not guaranteed in 2025. However, it will not be a surprise if they arrive. Speak with a financial adviser to ensure your tax plan works optimally, taking advantage of existing allowances before any possible changes arrive.
Inflation & Interest Rates
The cost of living continues to present challenges to UK households. Whilst aggregate living standards are rising slightly in 2024-25, the bottom 40% of the income distribution are worse off since the inflation spike in 2022.
Inflation has been on a downward trend since late 2024, leading the Bank of England (BoE) to cut interest rates three times since last August. However, headwinds are raising doubts over whether this trend will continue in 2025.
Since Donald Trump’s inauguration as US President in January, the US has levied tariffs on China, Canada and Mexico. It is unclear whether tariffs will also fall on the UK, but those put on other countries – especially those in Europe – could slow down global economic growth and, in turn, compress growth in the UK.
All of this could lead to delayed cuts to interest rates in the US, which could “spill over” into the UK. In particular, UK borrowing costs (gilt yields) could be higher for longer. In this scenario, UK growth slows down, the government faces greater pressure to raise taxes, and UK interest rates may not fall as quickly as some have predicted.
The takeaway? Think carefully about your savings, pension and mortgage in 2025.
For instance, if you are nearing the end of your fixed-rate mortgage, consider speaking with a financial adviser about the UK’s interest rate landscape and the possible timing of getting a new mortgage deal.
If you are approaching retirement, consider getting financial advice about approaching your investment strategy. A professional can help to get answers to important questions, such as whether to buy an annuity and which asset allocation to choose.
Final Thoughts & Invitation
It is important not to base big financial decisions based on what “might happen” to UK policy (e.g. tax laws), inflation and interest rates. Even the best economic forecasts and models are often wrong, and unexpected global events can change the landscape quickly.
However, it helps to ensure some flexibility built into your financial plan if any of these areas experience significant change in 2025. This could give you more room to adapt later if required.
Here at Castlegate, our financial advisers can assist you with this process – examining your current position, your financial goals, and how to progress towards them. If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
Please note:
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. Pension investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage. This content is for information only and not financial advice. Any decision to invest or plan for retirement should be made with the help of a financial adviser. Market volatility affects investment values. Inflation erodes savings over time. Liquidity risks may prevent quick access to funds.
