Is incorporation worth it?

Traditionally it has been worthwhile for self-employed taxpayers to incorporate their businesses – dividends being taxed at a lower rate than other income. How has the situation changed now that corporation tax is set to fall and dividend tax is increasing? The answer is that in the short term taxpayers will still be marginally better off and that – if no further changes are made to the tax system before 2021 – they will then be better off even though employment allowance (worth £3,000) will not be available to sole employee shareholders from 2020. This is all best explained with an example. If you have a business that earned £100,000 profit in 2015/16 incorporation would have saved you c. £4,700. Next year your saving would fall to c. £3,200. By 2020/21 the saving would have increased again to c. £6,000. Of course, these figures do not allow for the extra cost of incorporation.