The self-employed could find themselves up to 32 times more taxed than their incorporated counterparts.

On profits of £15,000, a self-employed person pays a combined income tax and national insurance contribution (NIC) of £2,884, compared to the £91 paid in corporation tax by a limited company.

On profits of £30,000, a selfemployed person pays a combined income tax and NIC bill of £7,234, compared to £3,654 in corporation tax for a limited company, according to a report by the Federation of Small Businesses (FSB).

The report follows Chancellor Gordon Brown's 2002 budget announcement that incorporated businesses (limited companies) would not have to pay tax on the first £10,000 of profits.

Also, the small companies rate of corporation tax would be reduced from 20 per cent to 19 per cent for companies with taxable profits of between £10,000 and £300,000.

The FSB said these benefits should be extended beyond the 485,000 limited companies that benefit 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 business structure over another.

"While limited company status may suit some businesses, incorporation in itself is not an encouragement to enterprise and entrepreneurs should have the right to retain the freedom and independence of being unincorporated."

The report suggests the reason behind the incentive to incorporate is a a more closely regulated small business sector and greater government control.

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

"If our suspicions about a hidden agenda 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 Gordon Brown to introduce a £10,000 tax-free small business allowance for all businesses over and above the current personal allowance of £4,615.

Audrey Whitney, the FSB's East Sussex regional chairwoman, 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."

Iain Duncan Smith, leader of the Conservative party, will address up to 600 delegates at the FSB's annual conference at the Hilton Brighton Metropole Hotel on March 21.

The conference will also hear speeches by the minister for small businesses, Nigel Griffiths, and the minister for disabled people, Maria Eagle.