So what do these proposed changes actually mean?

The fact that Gordon Brown only gave us an outline of the changes and not the full facts and figures makes the series of changes even more complicated!

However, in summary, the plans for income tax bands on earned income and NICs are as follows:*

Tax Year:	2007/08	2008/09*	2009/10*
Income tax
Personal allowance	5,225	5,225	5,225
Starting rate band	2,230	Nil	Nil
Basic rate band	32,370	34,600	35,400
Higher rates start at:	39,825	39,825	40,625
NICs
Lower earnings limit (no NICs)	5,225	5,225	5,225
Upper earnings and upper profits limits	34,840	38,740	40,625

* (ignoring increases expected due to inflation)

At first sight, a self employed person appears to benefit compared to a company, given the proposed reduction in the basic rate of tax that the self employed pay and the increase in corporation tax. In addition, the government is also intending to align the upper limit of the basic rate band with the upper earnings limit for NICs by 2009/10. This will mean that in 2008/09 and onwards:

the unincorporated business will pay more NICs at 8% rather than 1%;
if a company is paying out a salary to the director/shareholder above the current basic rate band, there will be more employees’ NICs at 11% rather than 1%.

The potential savings on incorporation will depend on a number of factors but the example below shows the level of savings that could be made. The essence of the savings continuing to be made compared to remaining unincorporated is that the shareholder/director can choose not to suffer the extra Class 1 NICs by extracting profit as dividend rather than salary.