A REPORT published today by the Federation of Small Businesses, has revealed that a self-employed person with £15,000 profits can pay up to 32 times more tax than their incorporated counterpart.

The report called The Self Employed versus Incorporated Businesses quotes figures from the Institute of Fiscal Studies that show that on profits of £15,000, a self-employed person pays a combined income tax and National Insurance bill of £2,884 32 times more than the £91 paid in corporation tax by a limited company.

A centre-piece of Gordon Brown's 2002 Budget was that incorporated businesses (limited companies) would pay no tax on the first £10,000 of profits and that the small companies rate of corporation tax would be reduced from 20 to 19 per cent for companies with taxable profits of between £10,000 and £300,000.

The FSB welcomes these moves on behalf of the 485,000 limited companies that benefit, but says there is no reason why they should not be extended to Britain's two million self employed.

Neil Hamper, head of the FSB's taxation unit, said: "A tax system should not create a competitive advantage for one type of business structure over another. Entrepreneurs should have the right to retain the freedom and independence of being unincorporated."

The report suggests that the overriding motive behind the financial incentive to incorporate is a desire to ensure a more closely regulated small business sector and greater government control.

Mr Hamper added: "The Inland Revenue certainly finds it easier to collect taxes from companies than from the self employed.

"If our suspicions are correct there is a danger that once greater numbers incorporate there will no longer be a reason to retain this generous tax regime."

The FSB is calling on the Chancellor to introduce a £10,000 tax-free small business allowance for all businesses over and above the current personal allowance of £4,615, which the IFS estimates would cost £2.5 billion.

Mr Hamper said: "The current regime penalises the very small businesses and a £10,000 tax free allowance for small firms would help to level the playing field.

"People running their own businesses should be able to choose which business model suits them best and not contend with the hoops and hurdles of incorporation in order to secure the generous tax breaks on offer."