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Tax changes may lead to rise in incorporations

Increasing numbers of sole traders may switch to limited company status as a result of the tax rates announced in the emergency Budget.

The Chancellor, George Osborne has committed the government to reducing the small company rate of corporation tax from 21 per cent to 20 per cent as from next April.

The cuts in large company corporation tax are even greater: down from 28 per cent to 24 per cent over a period of four years.

In contrast, sole traders are set to see personal taxes rise.

As from April 2010, the top rate of income tax rose to 50 per cent for those earning £150,000 a year, while personal allowances will start to be lost when income hits £100,000 per annum and national insurance contributions are to rise by 1 per cent next year.

The gap between corporation and personal taxes will be heightened by the fact that sole traders must pay income tax on their entire profits no matter whether the money is used for personal or business purposes.

Many in the accountancy profession are anticipating a rise in business owners considering incorporation.