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In Gordon Brown's 11th Budget, the Chancellor announced an increase in the rate of corporation tax to be paid by small companies. Yes this was the same Chancellor who had just a few years ago introduced a zero percent starting rate of corporation tax to encourage small companies (since abolished).

His reason for the increase - to deal with individuals artificially incorporating as small companies. Quite how he feels it is "artificial" to choose to trade as a limited company whilst its OK to trade as a sole trader or partnership, he did not explain!

Does this mean businesses trading as a comapany will in future pay as much tax as non-incorporated businesses?

Well no. The Chancellor stopped short of this.

Imagine a business making £50,000 profit, with two partners.

For 2007/08 partners joint after tax income is £38,500.

If they form a limited company, and take salaries equal to their personal allowances, their after tax income would be £42,000. The saving is £3,500 per annum.

By 2009/10 when the full effect of the Chancellor's increases have been phased in, the saving in the above example is reduced to £2,500.

For a more profitable business -profit £100,000 per annum the savings through incorporating are greater.

In 2007/08 the saving is over £7,800 per annum, by 2009/10 the saving will have reduced to £6,000 per annum.

So whilst it is going to be less attractive than it is now, a limited company does still look an attractive option.

Other factors to take into account:

A limited company offers the protection of limited liability, personal assets are not at risk should the business run into difficulties.

Negatives

Consider the company car (benefit in kind) tax implications. Business owners with large/expensive cars particularly those with small or modest business mileages will find an increase in tax for this area.

Consider the higher running costs for a limited company.