Summary of relevant changes to the tax system

• Rate of corporation tax for small companies
  
  The corporation tax starting rate was reduced from 10% to 0% with effect from 1 April 2002. Profits between £10,000 and £50,000 benefit from marginal relief, whilst profits between £50,000 and £300,000 are now taxed at 19% rather than 20%.
  
  The small companies corporation tax rate in 1996/97 was 24%. Since that time the basic rate of income tax has fallen from 24% to 22%, with only a relatively small amount being taxed at the 10% starting rate.
  
  
• Advance corporation tax
  
  The abolition of advance corporation tax on dividends has improved the position in favour of the basic rate shareholder taking dividends rather than being self-employed and taxed on the profits directly.
  
  
• National insurance (NI)
  
  Increases in NI for employers, employees and the self-employed have added to the incentive to avoid these charges.
  
  In 2003/04 the rate of employees’ NIC will be increased by 1% to 11%.
  
  In addition, this 1% increase will apply to all earnings and the current NIC upper earnings limit (which for 2002/03 is £30,420) will not apply to this element. The rate of NIC for the self-employed, currently 7%, will also rise by 1% and again this 1% will not be capped.
  
  All NI contributions can be avoided by incorporating, taking a small salary up to the threshold at which NI is payable and then taking the balance of post-tax profits as dividends (see case study one for further detail on this point).
  
  
• Stakeholder pensions
  
  Finally, the new regulations for stakeholder pensions mean that it is necessary only to take a salary one year in six. Pension payments in each of the six years can be based on the salary paid in that one year.