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If the New Year is for resolutions and dealing with the sobering reality of heavy credit card spending, then the new tax year in April is for making the most of our tax allowances.

We all like the idea of tax allowances but are not always clear what they actually are. Intriguingly recently conducted research of UK savers asked which of four ways of investing they were most attracted by; ISAs, Unit Trusts, Pensions or Tax Efficient Savings.

The vast majority of consumers were attracted to 'Tax Efficient Savings' rather than any of the product-specific options. Given that ‘ISAs’ and ‘Pensions’ themselves are tax efficient savings, it illustrates the confusion amongst UK investors when it comes to what financial products are and what they offer.

Tax allowances

It’s all very well shouting from every rooftop that it is the ISA season, but if a large percentage of the population fail to understand the relevance of this and how it is tied in with annual tax allowances, it is all a bit futile.

In simple terms, at the start of each tax year on April 6 an investor is allowed to make use of their annual tax free allowance. The most popular way of doing this is via an ISA, (an Individual Savings Account). This can either be via a cash ISA, which is effectively a deposit account but in this case without any tax paid on interest accrued or through and equity ISA which is invested in stocks and shares.

The current maximum annual allowance is £3,000 per annum for a cash ISA and £7,000 per annum for an equity ISA. However from April 2008, people will be allowed to save up to £3,600 in a cash ISA and up to £7,200 in a stocks and shares ISA, within an overall annual savings limit of £7,200.

The full significance of this is that a saver who has yet to use up the current years allowance and also wants to make use of the next tax free allowance due to them, can do so if they act quickly.

Consider Joe Haynes from Aughton in Lancashire who in the space of 24 hours last year managed to shelter £28,000 from the tax man’s grasp.

“I work as an IT consultant and had just received my bonus for the year. I put £7,000 into an equity ISA for the 2006 tax year on April 5 then another £7,000 was invested in the same way next day for the 2007 tax year. I also decided to use up my wife’s annual allowance by investing the same amount in her name. It was a no-brainer really, and it was really easy to sort it all out.”

For ISA savers this year, there is the opportunity to invest even more as the investment limits rise.

In terms of what you invest in the choice is extremely wide – for a good spread you could opt for a multi-manager equity ISA which means a selection of funds managed by different providers – this way you are not tied to one provider. Fidelity offer such products on their online funds supermarket, On the other hand if you want to keep things simple and charges to a minimum you could opt for a tracker fund such as the Legal & General UK 100 Index fund.

Not just ISAs

Of course tax efficient savings are not just about ISAs. Pension contributions are also tax free, this means that the pension provider claims tax back from the government at the basic rate of 22 per cent. In practice, this means that for every £78 you pay into your pension, you end up with £100 in your pension pot.

You can put money into someone else's personal pension - like your husband, wife, civil partner, child or grandchild's. They'll get tax relief added to it at the basic rate, but this won't affect your own tax bill.

A pension fund doesn't pay tax on any capital gains or investment income. Also, when your pension matures you can take up to 25 per cent of it as a tax-free lump sum, provided your pension scheme rules allow it and your total savings are within the 'lifetime allowance' for the year in which you take your benefit. For the tax year 2007-2008 this is £1.6m.

For those looking for a no frills and fully portable, tax efficient pension then a stakeholder pension fits the bill. In addition to the tax benefits, stakeholder pensions have been specifically designed to be more straightforward and have lower costs and charges than types of company or personal pension. These pensions are offered by life companies such as Legal & General and Standard Life.

National Savings

In addition to pensions, there are other tax-friendly investments for instance National Savings and Investments (NS&I). Tax-free savings and investment products from NS&I currently include:

• Fixed Interest and Index- Linked Savings Certificates - for savers aged seven or over
• Children's Bonus Bonds - can be invested for five years on behalf of children aged under 16
• NS&I also issues Premium Bonds. Whilst Premium Bonds, will not pay you interest, you can win tax-free prizes and unlike the National Lottery, it is a way of being in a draw without forking out for the privilege.

Tax deferral

Investors should consider making use of tax-free allowances as a matter of course but for many the next step is considering tax deferral. For those in the higher tax bracket, taking investments offshore is the perfect solution. Investing in an offshore bond allows interest to roll up gross. When the investor reaches retirement and therefore no longer in the higher rate tax bracket, the bond is encashed the money taken back into the UK with tax payable at the lower rate.

Expats

For those working outside of the UK offshore accounts can now be set up to pay in tax free salaries – for instance anyone working in Dubai would be paid tax free. That money could be put into an offshore savings account with interest paid gross.

To make life even easier, salaries can be paid tax free in local currency into a local bank account while a proportion can be paid into a UK account to maintain an ongoing mortgage back home etc. Both accounts will typically be online so that the investor can access account details whenever they want, wherever they want. For expats banking has never been so easy.