The increase in the small companies' rate of corporation tax will reduce the tax advantage for a self-employed person to incorporate and receive labour income as dividends. This impact increases corporation tax collected but reduces income tax and national insurance collected.
The measure will increase the corporation tax paid by those who have incorporated for tax reasons and will reduce the incentive for others to engage in this behaviour. The reduction in overall tax advantage depends on income level. For a self-employed person earning £30,000, the incentive to incorporate and take labour income as dividends will reduced by around £1,000 by 2009-10.
As the Chancellor noted in his Budget speech, if the tax-motivated incorporation is not tackled, it could cost the rest of the tax-paying population billions of pounds.