Spring Budget 2025: Complete Guide to Pension & Tax Changes

Introduction

The Spring Budget 2025, delivered by Chancellor Rachel Reeves on [insert date], brought significant changes for pension savers, retirees, and investors across the UK. Whether you’re planning retirement, managing a pension pot, or optimising your tax position, understanding these changes is crucial for your financial future.

This comprehensive guide breaks down every key announcement affecting pensions, inheritance tax, ISAs, and personal allowances—with expert analysis on what these changes mean for your retirement planning. In this guide, you’ll discover:

• Major pension and tax changes from the Spring Budget 2025
• How do these changes compare to the 2024 budget
• What the Spring Budget 2025 benefits mean for different age groups
• Actionable steps to optimise your retirement strategy

Key Spring Budget 2025 Highlights

The Spring Budget 2025 introduced several landmark changes designed to support savers while generating revenue for public services. Here are the most important announcements:

Pensions and Retirement

State Pension Increase

The State Pension entitlement will rise by 4.1% in April 2025, increasing the full new State Pension to approximately £230.25 per week (£11,973 per year). This increase follows the triple lock guarantee, which ensures the State Pension rises by the highest of:

• Average earnings growth
• Inflation (CPI)
• 2.5%

Pension Contribution Limits

• Annual Allowance: Remains at £60,000 for 2025/26
• Money Purchase Annual Allowance (MPAA): Remains at £10,000
• Tapered Annual Allowance: Threshold adjusted for high earners (those earning over £200,000)
• Consider maximising your pension contributions

Lifetime Allowance Abolition Confirmed

Following its removal in 2023, the Spring Budget 2025 confirmed that there will be no return of the Lifetime Allowance, providing certainty for high-value pension savers.

Inheritance Tax Changes

Pensions and Inheritance Tax

From April 2027, unused pension pots will be included in your estate for inheritance tax purposes. This represents a significant change:

• Current position (until April 2027): Pensions pass inheritance-tax-free
• New position (from April 2027): Unused pension pots included in £325,000 nil-rate band
• Impact: Estates over £325,000 (£650,000 for couples) will face 40% IHT on pension assets

With these new pension changes, it’s essential to assess whether your current pension savings align with national benchmarks. See UK pension pot benchmarks by age to understand if you’re on track.

Residence Nil-Rate Band

The Residence Nil-Rate Band (RNRB) remains frozen at £175,000 until 2030, meaning the total IHT allowance for couples passing a family home to direct descendants stays at £1 million.

ISA and Savings Changes

ISA Allowance

• The annual ISA allowance remains at £20,000 for 2025/26
• British ISA proposal deferred pending consultation

Personal Savings Allowance

Remains unchanged:

• Basic rate taxpayers: £1,000 tax-free interest
• Higher rate taxpayers: £500 tax-free interest
• Additional rate taxpayers: £0 tax-free interest

Income Tax and National Insurance

Tax Thresholds Frozen
Personal tax allowances remain frozen until April 2028:

• Personal Allowance: £12,570
• Basic rate threshold: £50,270
• Higher rate threshold: £50,271 – £125,140

National Insurance Rates

• Employee NI: 8%
• Self-employed NI: Class 4 – 6% on gross profits
• Employer NI: Increased to 15% (affecting business owners)

Spring Budget 2025 vs 2024: What’s Changed?

Understanding how the 2025 budget differs from the 2024 budget helps you identify new planning opportunities.

Key Insight: The biggest change is the inclusion of pensions in inheritance tax calculations from 2027, which will require an urgent review of estate plans for high-net-worth individuals.

Who Benefits from the Spring Budget?

Retirees and State Pension Recipients

• State Pension increase of 4.1% provides inflation protection
• No reduction in Winter Fuel Payments for eligible pensioners
• Continuation of the triple lock gives long-term certainty

Action: Review your retirement income to ensure you’re maximising tax-free allowances with the increased State Pension

Pension Savers Approaching Retirement

Benefits:

• Higher Money Purchase Annual Allowance allows more flexible contributions after the first withdrawal
• Lifetime Allowance abolition means no cap on pension savings growth

Considerations:

• IHT changes from 2027 may require estate planning adjustments
• Consider using pensions earlier in retirement to reduce IHT exposure

Action: Model different pension withdrawal strategies to balance income needs with IHT efficiency

High Earners and Business Owners

Benefits:

• Continued high Annual Allowance (£60,000) supports aggressive pension contributions
• No Lifetime Allowance means unlimited pension growth potential

Considerations:

• Tapered Annual Allowance reduces available contribution limit for those earning over£200,000
• Increased employer NI may affect company pension contributions

Action: Maximise pension contributions before April 2027 to keep funds outside your estate.

Younger Savers (Under 40)

Benefits:

• Frozen ISA allowance at £20,000 continues generous tax-free savings
• A long time horizon allows compounding before the 2027 IHT changes

Considerations:

• Frozen tax thresholds mean fiscal drag (more income taxed at higher rates)

Action: Balance pension contributions with ISA savings to diversify tax treatment.

The Spring Statement 2025 was smaller than the 2024 Autumn Budget, focusing on adjustments to spending plans and policy measures to meet fiscal rules amidst global uncertainties. ​ The OBR forecasts for GDP growth, inflation, household incomes, unemployment, investment, and long-term growth were updated to reflect significant changes and risks. ​ The Chancellor introduced new fiscal rules, and the OBR assessed the economy against them, highlighting the likelihood of meeting targets. Key policy announcements included changes to welfare, defence spending, housing and construction, and measures to increase tax revenue.

Spring Budget 2025 Summary: Quick Reference

Positive Changes ✅

1. State Pension Rise: 4.1% increase supporting retirees
2. Money Purchase AA Increase: More flexibility after accessing pension
3. Lifetime Allowance Confirmed Gone: No cap on pension savings
4. Triple Lock Protected: Long-term State Pension security
5. ISA Allowance Maintained: Continued £20,000 tax-free savings

Neutral/No Changes ➡️

1. Annual Allowance: Stays at £60,000
2. ISA Rates: £20,000 allowance unchanged
3. Capital Gains Tax: Allowance remains £3,000
4. Personal Allowance: Still frozen at £12,570

Challenges to Address ⚠️

1. Pensions in IHT from 2027: Major estate planning concern
2. Tax Threshold Freeze Extended: Fiscal drag continues until 2028
3. Residence Nil-Rate Band Frozen: IHT thresholds lag behind house prices
4. Employer NI Rise: May reduce company pension contributions

Strategic Planning: How to Respond to Spring Budget 2025

Estate Planning Actions (Before April 2027)

If you have a substantial pension pot (£500,000+), the inclusion of pensions in your estate from April 2027 requires immediate attention. Inheritance Tax Planning becomes a priority for pension savers after April 2027:

Option 1: Accelerate Pension Withdrawals

• Withdraw more from your pension before 2027
• Reinvest outside your pension (e.g., ISAs, property, gifts)
• Balance against income tax on withdrawals

Option 2: Gift Planning

• Use the £3,000 annual gift exemption
• Consider potentially exempt transfers (PETs) – IHT-free after 7 years
• Use the “normal expenditure out of income” rule for regular gifts

Option 3: Life Insurance Trust

• Set up a life insurance policy in trust
• Covers IHT liability on pension assets
• Ensures beneficiaries receive full inheritance

Example Scenario: John is retiring at 55, has a £800,000 pension pot and £500,000 in other assets. Under current rules, his estate faces IHT on £675,000 (over the £1m couple allowance with RNRB). From 2027, his full estate (£1.3m) would face IHT on £650,000, costing an additional £120,000. By withdrawing £300,000 and gifting it to his children now, he significantly reduces the 2027 IHT liability.

Pension Contribution Strategy

For High Earners:

• Maximise contributions before April 2027 to build IHT-free value
• Check if the Tapered Annual Allowance applies to you
• Consider carry forward from unused allowances (last 3 years)

For Business Owners:

• Review the employer contribution strategy given the NI rate increase
• Balance company pension contributions vs dividends
• Consider using business profits for pension funding before the tax year-end

Retirement Income Planning

Optimise Withdrawal Strategy:

1. Age 55-66: Use personal pension to fill personal allowance (£12,570)
2. Age 66+: Coordinate State Pension with flexible drawdown options to minimise tax
3. Age 75+: Review beneficiary nominations given IHT changes

Example Drawdown Strategy Post-Budget:

• Take 25% tax-free lump sum at retirement
• Draw £12,570/year to use personal allowance (tax-free)
• Let the remaining pension grow (but consider IHT implications from 2027)
• Use ISAs for additional income to stay in the basic rate band

What You Should Do Next

The Spring Budget 2025 creates both opportunities and challenges for your retirement planning. Here’s what to do now:

Immediate Actions (This Month)

1. Review your estate value – Calculate total assets, including pensions, property, and investments
2. Check your pension allowances – Ensure you’re maximising available tax relief
3. Update beneficiary nominations – Make sure pension death benefit forms are current
4. Model IHT scenarios – Calculate your potential IHT bill from 2027 onwards

Short-Term Actions (Next 3-6 Months)

1. Consider pension contributions – Use the full £60,000 allowance before April 2027
2. Review withdrawal strategy – Adjust drawdown plans to optimise IHT exposure
3. Explore gift planning – Use annual exemptions and PETs strategically
4. Check life insurance – Ensure adequate cover for IHT liabilities

Long-Term Planning (Next 1-2 Years)

1. Rebalance pension vs ISA savings – Diversify tax wrappers given IHT changes
2. Estate planning review – Update wills, trusts, and lasting powers of attorney
3. Monitor future budgets – Stay informed of further pension/tax changes
4. Annual financial review – Adjust strategy as circumstances change