generally saving is the best thing to do, but as phil says as you have beginner gear, it's probably worth upgrading with the amount of cash you have at the moment... there are some pretty nice guitars and amps around the £300 mark... i'm partial to washburn and yamaha (mexi and korean fenders are nice too) guitars at that price point, and laney tube amps are generally good bang for buck, but phil also made a good point about second hand stuff.
what type of music do you mainly play? we won't tell you what to buy, but can give you several options that you should attempt to get to try out yourself, so that you can buy the one you like best yourself.
£500 budget, right?