Johnny runs an unincorporated plumbing business and expects profits of £30,000 in the year to 31 March 2005. His total income tax and NI bill for the year will amount to £7,441 leaving him with net income of £22,559.
His brother Oliver runs a similar business but as a company. He draws a salary of £4,745 (equal to the 2004/05 personal allowance) and the balance of profits (subject to leaving enough in the company to pay the corporation tax) he takes out as a dividend.
Before the new regime he would have needed to leave £3,623 in the company to pay corporation tax giving him a dividend of £21,632. This level of dividend will not cause Oliver to become a higher rate taxpayer and therefore there will be no further liability on this amount. His total net income including his salary would have been £26,377.
Under the new regime he will need to leave £4,585 in the company to pay corporation tax giving a net dividend of £20,670 and total net income including his salary of £25,415.
Oliver is clearly worse off to the tune of almost £1,000. However he is still £2,856 better off than his brother by running his business as a company which represents almost 10% of his total profits for the year.