How to keep the taxman away - a layman's guide

It's getting tougher to find tax loopholes, but just follow these few simple rules and you could keep a great deal of your hard-earned cash out of the clutches of the Inland Revenue. Barbara Oaff reports

It was John Maynard Keynes who argued that "the avoidance of taxes is the only intellectual pursuit that carries any reward".

If the pioneering post-war economist is right, reaping that reward remains a challenge. But there are ways to ease a tax burden. And now really is the time to seize them.

First, however, a warning. "It has become harder to plan your taxes", says James Quarmby, a tax partner with the law firm Thomas Eggar. He points out that in recent years the Government has closed loopholes, frozen the level of allowances and exemptions and enforced existing legislation more strictly.

He points out too that tax law, which used to change just once a year with each budget, now changes throughout the year. Eggar concludes that: "Preparing your finances has, therefore, become more and more complicated.".

That said, even with next week's Budget, most experts expect the key rules and regulations on tax to stay intact. "On the whole, I think the status quo will continue," says Campbell Edgar, an investment manager with Bloomsbury Financial Planning.

So, with that in mind and the tax year-end approaching, what can you do in the next couple of weeks to ease your tax burden? We posed this question to two tax advisers - Mike Warburton of Grant Thornton and John Whiting of PricewaterhouseCoopers.

Here, then, is their joint action plan:

The simplest step is to ensure you choose a tax-friendly account for your savings. For higher-rate taxpayers in particular it makes sense to ensure that these are utilised first. The most obvious way of doing this is through an Individual Savings Account, or Isa. This allows savers to invest up to £7,000 a year in a stocks and shares Isa, or up to £3,000 a year in a cash Isa. There is no income tax to pay in interest paid on a cash Isa and all gains in a stocks and shares Isa are free of capital gains tax.

Intelligent Finance estimates that a higher-rate taxpayer, investing the full £3,000 in a cash Isa, will enjoy tax breaks of about £3,850 over 10 years. For a full list of Isas go to Moneyfacts.co.uk.

If you are moving home don't pay more stamp duty that is necessary. Stamp duty is charged at one per cent on homes sold for between £60,001 and £250,000; then 3 per cent for homes sold between £250,001 to £500,000 and then at four per cent above this threshold.

The higher rates are charged on the full purchase price. If you are buying a home that is priced marginally above a threshold, try to attribute as much of the price as reasonable to features such as curtains, carpets and built-in appliances and then pay for them separately. If the sums take the price of the home under the threshold, you will have saved thousands of pounds. The housing market has been slowing, so sellers may be more open to negotiation on price.

Mortgage payers should look at getting an offset mortgage. The interest on any savings held in a current account will be offset against the interest due on your mortgage, so effectively your savings will be tax free.

Couples should ensure they maximise their exemptions in regard to income and capital gains tax. As far as income tax is concerned everyone is entitled to earn £4,745 a year tax free. So if one partner is not-working any income-earning assets ought to be transferred into their name. This includes savings accounts, rented property, plus shares and collective investments. This way they can secure this income, tax-free, up to their personal allowance.

Similarly, married couples should make sure they make the most of both partners' capital gains tax allowance. Everybody is entitled to make a gain each year of £8,200 without paying capital gains tax - payable at 40 per cent. However, assets sold between husband and wife are free of this tax. So if a married couple were selling assets - be it a business, shares or even expensive antique furniture - that exceeds the limit, they should ensure that assets are transferred in such a way that both CGT allowances are used.

Pensions are another effective tax-planning tool, particularly for higher-rate taxpayers. For every 78p you contribute to a pension plan, the Government will add an additional 22p. Higher-rate taxpayers can in addition reclaim a further 18p.

Currently the maximum amount you can contribute to a pension depends on both your age and earnings. But the majority of people can contribute up to £2,808 in a stakeholder pension scheme. Those with non-working partners should make the most of this allowance, as a tax-efficient means of boosting savings. For basic-rate taxpayers a £2,808 contribution would be grossed up to £3,600 - and higher-rate taxpayers can claim back an additional £642.

This is particularly tax-efficient if the non-working spouse remains a non-taxpayer in retirement, as the income taken from this pension will be tax-free, even though the contributions have earned higher-rate tax relief on the way in.

It is also possible to make this contribution into a pension plan for a child or grandchild and still gain this tax relief.

If you are thinking about the next generation, be sure to also take advantage of inheritance tax laws. Any assets worth more than £263,000 will be taxed at 40 per cent in the event of your death. According to the latest TaxAction survey, heirs miss out on more than £1,585m a year due to a bad inheritance tax planning. There are several ways to avoid this. To start with, spend your annual inheritance allowances. Each year you can gift up to £3,000, tax-free. You can also gift any surplus income, in lots of up to £250, once again tax-free. Next, if you haven't already done so, seek guidance on how to divide up your estate so that each spouse effectively uses up their nil-rate band. Finally, double-check your will.

There are various investment schemes which also offer attractive tax incentives - but beware, all carry risks. Accountants are fond of saying "don't let the tax-tail wag the investment dog" and this is certainly true when considering Enterprise Investment Schemes, venture capital trusts and forestry investments. All have favourable tax treatments but if they are not a suitable investment, steer clear.

Plan carefully and it seems you could find yourself reaping some of those Keynesian rewards.