Britain is on the brink of sliding into its first recession since the early 1990s as high credit costs douse the once red-hot housing market and companies struggle with sharply rising costs.

The UK economy froze in the second quarter of the year — the first time it has not grown in a three-month period since 1992 — and Charlie Bean, deputy governor of the Bank of England, warned last week that Britain was gripped by an economic situation as challenging as the 1970s.

As the storm clouds gather, consumers have been advised to shore up their finances and position their investments to take advantage of the impending gloom.

Rebecca Chesworth at Threadneedle, the investment manager, said: “Even in a recession there are industries that are still growing, offering investors opportunities.”

Here we offer some tips on recession-proofing your life:

BUILD UP A CASH CUSHION

Advisers suggest you build up a cash cushion of at least three months’ salary. The money should be in an easy-access account, so it’s there for an emergency.

Watch out, though, for strings attached. Of the top 50 “easy-access” accounts, 15 limit the number of withdrawals you can make or impose penalties on withdrawals, the financial-research firm Defaqto said.

The best instant-access account that has no withdrawal restrictions on balances of £5,000 is with Kaupthing Edge at 6.55%.

MAKE THE MOST OF

YOUR READIES

Rates of interest on current accounts vary wildly, with many of the big banks paying a paltry 0.1%.

Last week, Lloyds TSB launched its Vantage account paying interest at 5% — but only on balances of £5,000 to £7,000. Those who keep a balance of less than £1,000 will receive just 0.1%, the same rate you get for the entire month if you fall into the red.

HSBC has stopped paying interest on non-fee paying accounts altogether.

Andrew Hagger, at the price-comparison site Moneynet, said Alliance & Leicester’s Premier Direct account is the best for balances of up to £2,500. It has a rate of 8.5%, although this is only for the first year and you have to pay in at least £500 a month.

REDUCE YOUR MORTGAGE

UK personal debt has hit a record £1.44 trillion — making consumers more exposed to a downturn than ever before.

Reducing your debts will make you better placed to cope with tough times.

Making mortgage overpayments will reduce the amount of interest you will pay. Most lenders will charge a fee of 3%-5% for overpayments of more than 10% of the outstanding balance per year.

If you have significant savings, an offset mortgage could prove cost-effective. Savings are offset against your mortgage debt, so you pay interest on the difference.

“In a recession, cash is king. With an offset mortgage, you can reduce the interest you pay on your debt while still keeping the cash available in case of emergency,” said Melanie Bien at Savills, a broker.

The cheapest offset rate is 5.98% fixed for two years with First Direct, with a £1,998 fee. Someone offsetting £20,000 in savings against a £200,000 mortgage with fees added to the loan would save £2,392 in interest over two years — or £5,980 if they offset £50,000 in savings, said Bien.

INVEST IN DEFENSIVES

Some sectors continue to do well, even in a recession. Defensive or “non-cyclical” stocks — those that tend to remain stable in difficult economic conditions — include food, tobacco, oil and healthcare.

Chesworth said UK supermarkets and energy firms should fare well, as they are able to pass on soaring prices to consumers. “This may not be the most ethical of options, but firms such as Scottish & Southern Energy do benefit from inflation.”

Investors looking to ride out the recession should also consider firms that are largely exposed to overseas markets. Almost 70% of revenues of FTSE 100 companies come from overseas, according to Fidelity International.

Half of the retail floor space at the supermarket giant Tesco, for example, is overseas, while Prudential now receives more than half its new business from Asia. Chesworth recommends London-listed Smith & Nephew, a global business that produces knee and hip replacements. “This is likely to benefit from people living longer in all parts of the world,” she said.

She also likes British Aerospace because much of its business relies on the US defence budget. It has an order book that is three years long.

Tom Ewing, manager of the Fidelity UK Growth fund, has increased exposure to Diageo, the drinks company, moving it into his top 10 holdings at the end of last year.

The company exports whisky to China, where the demand for branded goods among the growing middle classes is on the increase.

TAP INTO THE STRONGER

DOLLAR

Firms that derive much of their sales from America should also do well as the dollar continues to strengthen against the pound.

Gary Dugan at Merrill Lynch Global Wealth Management expects the dollar to rally to $1.75 against the pound by the end of next year, from the present $1.82.

“The weakness of sterling is allowing firms with international operations to benefit as dollar and euro earnings feed through into stronger sterling profits,” said Mike Prentis of Black Rock’s British Smaller Companies investment trust. He favours the aerospace and defence, software and services, and capital-goods sectors.

Income-protection insurance covers you if you lose your job. However, it can be costly and often has a raft of exclusions.

Payprotect, for example, offers a policy costing about £44.40 a month to cover you for £1,000 of your salary per month for 12 months, or £66.60 for cover of £1,500 a month. However, you cannot make a claim within 180 days of taking out the policy. You will also be unable to claim if you were not in continuous employment for at least six months before being made redundant.

IProtect is a better option. It has a 60-day exclusion period and charges just £26.40 a month for cover of £1,000 a month.

Lenders heavily push the policies when people take out a mortgage or other debts. The industry generates £5 billion of premiums per year, but only a fifth of that is paid out in claims. Stand-alone cover is invariably cheaper.

Simon Burgess at broker British Insurance, said that many City workers, homebuilders and estate agents were being refused insurance, as insurers saw them as too great a risk. He said: “Never leave it too late and shop around as the rates for the same level of cover can vary significantly.”

BE TAX-EFFICIENT

The Centre for Economics and Business Research estimates that up to 19,000 City jobs will be cut by the end of 2009 — up from its previous forecast of 11,000. More than 3m workers fear they will lose their jobs in the next 12 months, a poll from the TUC revealed last week.

If you are made redundant, the first £30,000 of any redundancy payment is tax-free, unless a sum is stipulated within your contract; in that case, the entire amount is taxable.There are ways, though, you can reduce the tax bill.

Ensure that any redundancy payment is made after you have received your P45. That way, if your income for the year has not yet exceeded the upper earnings limit, you will only be taxed on the payout at the basic rate of 20%.

If your income for the 2008-9 tax year subsequently pushes you into the higher-rate tax bracket, you will have to pay the remaining 20% via the tax-return system. Returns for the current tax year must be filed by January 31, 2010, giving you 17 months of breathing space.

Should you have spent long periods working abroad, you might be entitled to “foreign service relief” on any redundancy payment.

If at least 75% of your total service was abroad or you spent the last 10 years overseas, you could be wholly exempt from tax on the payout, said Geraint Jones at the tax adviser FW Stephens.

If you have been with the same employer for 20 years and half that time was spent working overseas you will also be eligible.

If you don’t need the money, consider asking your employer to make a lump-sum payment directly into your pension fund. Instead of being charged tax, you will receive tax relief at your highest rate.

Save a fortune

Rising food and fuel bills have pushed the cost of living to a high, but some cost-free steps can save a small fortune.

After tax and essential costs such as energy, food, clothing and insurance bills, the average family will have £14,520 to spend, down from £17,102 last year, comparison site Uswitch said. However, households could save £962 per year by taking some simple steps.

Switching to the best utility deal would provide the largest saving. If you have never switched suppliers and pay by cheque or cash every quarter, you can save more than £450 per year by opting for the cheapest online, direct debit deal.

Eon, for example, charges £1,297 for dual fuel on a standard tariff, but you can get an online direct-debit rate costing about £845 from British Gas.

There are also simple cost-saving measures to reduce household energy consumption:

*A three-bedroom detached home could save £40 a year by switching to energy-saving light bulbs, according to the Energy Saving Trust.

*Turning the thermostat on your central heating down by one degree would save £70 a year.

*Turning an appliance off instead of leaving it on standby would save another £30.

*Washing your laundry at 30 degrees, instead of 40, could cut costs by £10 per year.

*Only boiling as much water as you need could take another £10 per year off energy costs.

*Turning off the lights could cut costs by about £10.

The best home telecoms deals come as bundles offering TV, phone and broadband. Switching from separate suppliers could save you over £140. The best car insurance deal at renewal could save another £200 per year, according to Uswitch.com.