If you are considering converting your sole trader business to a limited company (bv), there is a great deal to think about. One topic that tends to slip under the radar is pension. Nevertheless, it is wise to consider this in good time, because the way in which you can save for retirement changes considerably once you are working as a director-major shareholder (dga) within a limited company.
Pension as a freelancer or sole trader: how does it work now?
As a sole trader, you do not build up a pension through an employer. You fall outside the second pillar — the collective pension schemes — and are personally responsible for your retirement provision. That may sound disadvantageous, but the tax authorities do offer some relief in the form of the retirement reserve (FOR) and the tax relief available for annuity premiums.
Many freelancers and sole traders save through a bank savings product, an annuity insurance policy, or simply a private savings account. As long as you have no employees and no limited company, that is also the only route available. Owner-managed pensions — whereby you build up a pension within the company itself — were possible until 2017, but were officially abolished for new accrual after that point.
What changes when you set up a limited company?
Once you have a limited company, you will in most cases also become a director-major shareholder (dga). This brings an important difference: you are an employee of your own company and receive a salary (the customary wage). As a result, your pension options shift.
No more owner-managed pension
Previously, it was popular for a dga to build up a pension within the company — the so-called owner-managed pension. This was fiscally attractive: the company was permitted to record a pension liability on its balance sheet, which reduced taxable profit. However, as of 1 January 2017, this option was abolished. Existing rights were frozen at that time and could be cashed out or converted into a retirement obligation (ODV). New pension accrual within the company is no longer possible.
Pension through an external insurer or bank savings
As a dga, you can still build up a pension through an external pension insurer or bank savings product. The company then concludes a pension agreement with you as an employee, and the premiums are paid to an external party. This is the most common route for dgas who wish to save for later in a tax-efficient manner.
The retirement obligation (ODV)
Did you build up an owner-managed pension before 2017 and convert it into an ODV? In that case, the ODV simply remains on your company’s balance sheet. This plays no role in the conversion of a sole trader business to a limited company — the ODV is, after all, already a limited company construct. However, if you are bringing in an existing company or merging with another structure, it is advisable to examine the consequences carefully.
The transition: what do you need to arrange?
When converting your sole trader business to a limited company, there are a number of steps that directly affect your pension accrual. It is wise to discuss these with an adviser in good time.
Plan een vrijblijvend gesprek en ontdek wat we voor je kunnen betekenen.
Plan een gesprek- Wind up your fiscal retirement reserve (FOR): When your sole trader business ceases or is converted, the FOR is released. This has tax consequences. Make sure you know how large the release is and what this means for your tax assessment.
- Make use of the cessation annuity deduction: Upon conversion, you may be eligible for an enhanced deduction if you convert the cessation profit (in full or in part) into an annuity. This can be an excellent way to roll funds into a pension product in a tax-efficient manner.
- Determine your preferred pension structure as a dga: Will you opt for bank savings, a pension insurer, or a combination? And how does this relate to the desired salary from the company?
- Draw up a pension agreement: If you wish to build up a pension through an external party via the company as a dga, a formal pension agreement is required.
- Take the customary wage into account: The level of your dga salary partly determines the scope for pension accrual. A salary that is too low will limit your pension accrual possibilities.
Tax considerations during the transition
Converting your sole trader business to a limited company is not only a legal step, but also a fiscal moment. HM Revenue & Customs — or in the Dutch context, the Belastingdienst — scrutinises the settlement of the retirement reserve carefully, as well as whether cessation facilities are being applied correctly. A good tax adviser can help you determine which route is most advantageous in your particular situation.
Bear in mind also the administrative obligations that change once you have a limited company. Payroll administration, annual accounts, and corporation tax returns all come into play — matters that are closely intertwined with your pension planning as a dga.
What if you have just started out or are still undecided?
Are you still exploring the possibility of setting up a limited company? If so, it is wise to include pension in that conversation. Not just the question of whether a limited company is a sensible choice, but also what your pension accrual will look like afterwards. That gives you the complete picture.
Why Belastingadviseur Eindhoven?
At Belastingadviseur Eindhoven, we understand that as an entrepreneur you are not only thinking about today, but also about tomorrow. We assist business owners in Eindhoven and the Brabant region with the transition from sole trader to limited company — including the tax settlement of your retirement reserve, the choice of the right pension structure, and setting up correct administration as a dga.
Would you like to know what the conversion means for your pension in your specific situation? Please feel free to contact us without obligation. We would be happy to think things through with you.
Frequently asked questions
Can I still build up a pension within my limited company as a dga?
No, owner-managed pensions were abolished for new accrual as of 1 January 2017. As a dga, you can build up a pension through an external insurer or a bank savings product. Existing rights that have been converted into a retirement obligation (ODV) do remain on the company’s balance sheet.
What happens to my fiscal retirement reserve when I convert to a limited company?
When you convert your sole trader business to a limited company, the FOR is in principle released. This is taxed as cessation profit. In some cases, you can make use of the cessation annuity deduction to process this in a tax-efficient manner. Seek advice on this, as the rules depend on your specific circumstances.
How high does my dga salary need to be for good pension accrual?
The level of your dga salary influences your pension accrual capacity. The tax authorities set minimum requirements for the customary wage. It is advisable to work together with a tax adviser to determine which salary is optimal both fiscally and for your pension.
We are happy to think along with you. For advice tailored to your situation we would gladly sit down with you. No rights can be derived from the content of this page and it may contain inaccuracies.
