NEW tax laws mean most "one man band" businesses and small partnerships can lop thousands of pounds off their tax bills by becoming a limited company.

Special adviser Ken Moody of Bury-based accountancy firm DTE believes sole traders making annual profits of between £20,000 and £50,000 can save between £3,000 and £4,000 by converting to a limited company.

But he stressed there is a downside, especially greater regulatory burdens on limited companies and extra fees for professional advisers.

Mr Moody said: "For partnerships, the calculations are a little more complicated, but for a partnership of two where each partner's share of profits is the same £20,000-£50,000 range, the savings per partner is about £2,000 to £3,500 per annum."

The figures of potential tax savings are on the basis that only a small salary would be drawn from the company and the rest of the profit paid as dividend.

Until a couple of years ago, most accountants and tax advisers would not recommend forming a company until profits had reached at least £45,000. However, changes in tax law mean forming a company is attractive at lower profit levels than previously.

He added: "It is not easy for financially unsophisticated sole traders to get to grips with the complexities of operating as a limited company and this can cause problems, giving rise to claims from the Inland Revenue for PAYE tax and NIC."

Mr Moody concluded: "Before recommending forming a company, the sole trader's professional adviser needs to explain what is involved and the client needs to carefully consider if he or she is able to cope with the requirements."