The new dividend tax regime is coming into force from 6 April 2016. The widely held opinion is that incorporation will still be more tax efficient than a sole trade, but that the savings will be reduced.

The new rules will introduce a £5,000 dividend allowance (which uses up part of the tax band applicable to the individual), remove the concept of a notional tax credit, and introduce new tax rates applicable specifically to dividends. The changes involve all shareholders, so investors will be affected; but the move is targeting smaller businesses in a bid to discourage tax-motivated incorporations.

Sole trader. Historically it has been tax efficient to incorporate a sole trader business into a one-man company at relatively modest profit levels. Following the changes, it was assumed by many that this would still be effective but at higher levels of profit, i.e. that sole traders with lower profits would see less benefit in incorporating.