In my wifes passport I just noticed it's not that long now until the settlement visa expires. What do I do when it reaches it's expiry date? Does she have to go to the english embassy and say 'hey, just to let you know, me and my husband still live here"?

Where are you that you think there is an English embassy nearby?

It's the Home Office, or more correctly these days, the Borders and Immigration Agency, to which you need to apply for an extension.

On the assumption that your wife arrived in the UK within 28 days of her visa being issued, she should make an application for indefinite leave to remain within 28 days of the visa's expiry. She should complete form SET(M) and supply the requested supporting documentation along with the fee of £750.00 for a postal application.

In order to qualify for indefinite leave, your wife must have either sat an ESOL with Citizenship course or passed the Life in the UK test. If she has done neither, then don't bother applying for the indefinite leave, as it will automatically be refused. In such an situation, your wife should apply for a 2-year extension to her current conditions at a cost of £395.00, using form FLR(M).

Scouse.