How to survive the ups and downs of 2005

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New research from Alliance & Leicester Personal Loans reveals that reducing and paying off debts is a priority for half the UK population this year, closely followed by increasing savings.

To cut debt, six in 10 said they would start budgeting in the new year and try to spend less. One-third would consider a second job.

Andy Bayes, the head of personal loans at A&L, said: "People are beginning to see that by budgeting better, personal debt can be reduced considerably. This doesn't just mean spending less, but also paying less interest on your debts."

The findings are remarkably close to the advice of financial advisers and debt agencies. They say that, to avoid any pitfalls, you should set firm guidelines, whether you are saving, investing or simply trying to keep the bailiff from your door.

Moore Stephens, the accountancy group, said that people should review their financial commitments to ensure they provide best value and pay the least tax.

Keep proper, organised records of your income and expenses, so that you can complete your tax returns and answer Inland Revenue questions easily.

If your spouse pays tax at a lower rate than you do, consider transferring income-yielding assets such as shares or unit trusts to them so that the income is taxed at the lower rate, if at all.

If you are planning to cash an insurance bond, and your spouse pays tax at a lower rate than you do, assign the bond to your spouse beforehand, so that tax suffered on any gain in value will be reduced or possibly even negated.

The same principle applies to investments that are showing a capital gain. Make use of your spouse's annual capital gains tax exemption, by transferring the assets to your spouse before they are sold. Even if both of you have used up your annual exemptions, a transfer can still prove worthwhile if your spouse pays tax at a lower rate.

Taxpayers who have made charitable donations, or are planning to do so, should ask the charity for a gift-aid form so that it can claim 28p for every £1 that you give. Higher-rate taxpayers should keep a copy of the form to claim the higher rate. Gifts made by the end of this month can be put in the 2003-4 tax return.

If you have given your children Christmas money to save, keep it in a separate bank account, away from money that they have received from grandparents, uncles, aunts or friends. You will be taxed on any income of more than £100 that their savings generate from what you give them. But they can then take full advantage of their personal income tax allowance of £4,615 on gifts from elsewhere. You should fill in Inland Revenue form R85 to tell banks or building societies not to deduct tax.

Your children also have their own capital gains tax annual exemption of £8,200 for the 2004-05 tax year, wherever the money comes from.

If your children are likely to start university this year, ask them how they or you are going to pay for it.

Although the pension rules will not change until April 2006, it is not too early to be thinking about how to take best advantage of the new regime. This will set a lifetime limit on an individual's pension pot, starting at £1.5m, and a person can put the equivalent of his or her entire annual salary into that pot. It will all attract tax relief, but remember that you cannot touch it until you reach retirement age.

If your problems are less to do with making the most of a nest egg, and more to do with how to make the least of your debts, then the key is to share the problem.

Callcredit, the credit reference agency, advises that you should get in touch with your creditors as soon as possible. Most of them will be sympathetic and let you make reduced payments on a temporary basis. So the sooner you put your hand up, the better.

Above all, do not ignore letters and phone calls from your creditors. If you do not respond, you could be defaulted or even end up with a county court judgment against you. That would remain on your credit file and affect your ability to obtain credit for six years.

Take advice. If you have a bank manager or financial adviser, make sure you talk to them. Otherwise, free help is available from the Citizens Advice Bureau, the National Debtline or the Consumer Credit Counselling Service. And the credit rating agencies, Callcredit, Experian and Equifax, can tell you your debt position in a short time.

Meanwhile, keep it simple. Be particularly wary of taking on more debt to pay off your existing borrowings. Debt consolidators are in business to make money out of you, and while they will cut your monthly repayments those repayments will go on much longer.

Consumer Credit Counselling Service: 0800 138 1111.

National Debtline: 0808 808 4000.

Callcredit: 0870 0601414, www.callcredit.plc.uk

Experian: 0870 2416212, www.experian.co.uk

Equifax: 0870 5143700, www.equifax.co.uk

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