Tax Implications of Incorporation and Director Salary Levels for Small Businesses – Changes from Autumn Budget 2024

Earlier this year we published two articles looking at how cumulative changes to small business taxation in recent budgets, notably NI changes and increases in Corporation Tax, impacted taxation for small businesses, The first of these articles looked at the tax differentials of Incorporation versus operating as a Sole Trader or Partnership, the second whether the normal low salary / high divided approach should change for company directors, and if so the best salary levels.

How Do Recent Tax Changes Impact Choice of Business Structure? Part 1 – Incorporate or Not?

How Do Recent Tax Changes Impact Choice of Business Structure? Part 2 – Director Salary Levels

The question arises whether the rise in Employers NI from April 2025 changes the conclusions.

In short, no.

On the first point, incorporated v unincorporated structures, modelling with some standard assumptions suggests that incorporation still brings a tax penalty, and this will increase slightly if the business doesn’t have access to Employment Allowance (broadly, if the sole employee paying NI is also the sole director).  The table below amplifies this.   The take away is that incorporation isn’t the magic tax panacea its assumed to be, however for many businesses an incorporated structure will still be preferable for risk management or image.

On the second point, the changes to Employers NI and the Increased Employment Allowance doesn’t change the significantly the low salary / high dividend preferred ix, all other things being equal.  Some people will require higher salaries, eg for pension contribution capacity, mortgage affordability, parity in multi owner businesses, or other valid reasons.

Relative Tax Costs for Incorporated versus Unincorporated Structures

This table shows the position – please do be aware there are some typical assumptions in here, so personalised advice is necessary.

For the two director example, the budget has no impact as the modelling assumes availability of Employment Allowance.  If the business has staff, then the position will change, maybe giving Employment Allowance to the single director businesses, or maybe allocating Employment Allowance to the Employers NI costs of other employees – again the position needs to be looked at individually.