Balance your budget as tax squeeze looms

April is indeed the cruelest month, when tax hikes hit the family budget. However, the combination of a tax cut, through a higher personal allowance, with increases to NI, will see many wage slips little changed.

An average family with two children where two parents together earn 40,000 will gain just under 40 monthly, including adjustments to tax credits, adding 477 to their annual take-home earnings.

A single person earning 25,000 will see 15.60 extra in his or her wage packet monthly. A better-off family, jointly earning 75,000, will lose 2 per month or 25 annually.

But stable take-home pay won't stop us feeling poorer. The squeeze on living standards is coming rather from higher inflation, triggered in part by the rise in VAT, pushing up prices in the shops.

Paying as little tax as possible is the best way to fight the squeeze. Here are our top tips on how to beat the taxman.

1. National insurance

NI is going up by 1 per cent across most bands. Currently, anyone earning between 110 and 884 weekly pays 11 per cent of that band in NI. Above 844, NI is deducted at 1 per cent of earnings.

However, from 5 April the bands are changing, taking some lower earners out of NI altogether, and kicking in at 139 weekly up to 817. Furthermore, the rate is increasing by 1 per cent so that employees will lose 12 per cent of earnings on the first band and 2 per cent above.

Action: You could consider salary sacrifice where you ask your employer to make larger contributions into your pension in return for a cut in salary. You forego salary in return for a larger pension contribution, but this will save you a potential 12 per cent NI hit.

However, use this approach with caution if you are a member of a final salary pension, or have any other benefits attached to your salary. A lower salary will mean a lower pension.

2. Income tax

The good news is that the personal income tax allowance is rising to 7,475, which will cut most people's tax bill, but not that of the better paid. The threshold at which workers begin paying 40 per cent tax is lowering to 35,000 from 37,400, which means higher tax will kick in at 42,475.

Action: Giving to charity via gift aid can keep you out of the higher rate by effectively extending your standard rate band. You continue to pay 40 per cent tax via your pay packet. The charity claims a basic tax refund on your gross donation, but can claim back the excess via a self-assessment form.

3. Personal allowances

Husbands and wives should make sure they fully use each personal allowance. This is particularly important for the over-65s, who each have a personal allowance of 9,490. If they swap assets between them, then the one with the lowest tax bracket can enjoy a bigger return.

But this holds true with families. Children have the same personal allowance as adults, and can be used to shelter gains.

Action: Examine the tax situation of all close family and use their allowances to shelter from tax.

4. Pensions

A new tax year is always an opportunity to consider bumping up your pension contributions. This year it is more important than ever to cast your eye over your pensions, as from April the tax treatment of pensions is to be overhauled. Next week we will be explaining the changes and what they mean for you.

Action: Get out your pension statements. Familiarise yourself with how much you have saved, the kind of pension you are heading for, and whether you could afford to boost your contributions.

5. Isas

These tax shelters come in different forms. You can invest 10,200 free from tax in an equity Isa. Alternatively, you can put 5,100 in a cash Isa, invested in a building society or bank account and leave it at that. Or you can invest your maximum 5,100 in a cash Isa and top up to 10,200 in equities.

Taxpayers with money on deposit should always keep this cash in an Isa as it will shelter them from income tax deductions on their interest. It still offers automatic access to your cash. Equity Isas primarily shelter savers from capital gains tax, but can nevertheless be useful for those saving for retirement outside a pension.

Action: Wherever possible use your Isa limit each year as it can build to a significant nest egg. At least use your cash Isa limit, as if you do not use it you lose it.

6. Holiday lettings

Furnished holiday lettings in the UK used to attract certain tax concessions, most favourably the ability to offset losses against other income.

This allowed owners, when they had a bad year on lettings, to get help from the taxman with mortgage interest to reduce their total tax bill.

PricewaterhouseCoopers tax adviser Susannah Simpson explains: "The ability to offset furnished holiday letting losses against other income will stop from April 2011, but other tax benefits remain such as offsetting losses against future holiday letting income and capital gains and pensions incentives. The benefits have also been extended to cover lettings of European properties, which is good news.

"There is more bad news to come, as from April 2012 to qualify for this treatment a property must be available for letting to the public for 210 days a year and actually let for 105 days (increased from the current 140 and 70 days respectively)."

Action: If you want to continue letting under these rules, start planning to make your property available for longer, and let it for 105 days annually.