When you convert your sole trader business to a limited company (bv), more changes than just your legal structure. Your pension accrual and any existing annuity arrangements also take on a different character. What exactly changes and what should you watch out for? This article sets out the key considerations.
Pension accrual as a self-employed person versus a director-shareholder
As the owner of a sole trader business, you do not build up a pension through an employer. You are personally responsible for your retirement provision. Many self-employed people do this through an annuity insurance policy or bank savings product, or simply by saving and investing in their business.
Once you set up a limited company and become a director-major shareholder (dga), that situation changes. You are technically an employee of your own company. This opens up different possibilities and brings new obligations in the area of pension accrual.
What happens to your existing annuity entitlements?
Have you already built up an annuity policy as a self-employed person? If so, you may simply continue it after setting up a limited company. The policy is held in your name as a private individual and is separate from your business. In principle, you can continue making premium payments after the conversion, provided you have sufficient annual allowance or carry-forward allowance.
It is wise, however, to recalculate your annual allowance after the conversion. This allowance depends on your income from work. As a director-shareholder, that means your customary salary, not the company’s profit. This may be lower than your profit income as a self-employed person, which could reduce your annual allowance.
Pension accrual through the limited company: the options
As a director-shareholder, you have a few options for building up a pension through or from the limited company:
- Paying annuity premiums privately: your limited company pays you a salary, and you contribute a portion as a premium into an annuity policy or bank savings account. This is tax-deductible in your personal tax return.
- Pension through an insurer: your limited company takes out a pension agreement with an external insurer. The premiums are deductible for the company.
- Pension held within the company: this was possible until 2017 but has since been abolished. If you still have an old entitlement, transitional arrangements apply.
Which option is most advantageous depends on your personal circumstances, the salary you pay yourself, and the financial position of your limited company. Make sure you are properly informed before making any decisions.
Cessation annuity: an opportunity upon conversion
When converting a sole trader business to a limited company, there may be a cessation event for tax purposes, depending on the chosen method. Consider a transfer with tax roll-over relief where hidden reserves and goodwill are settled. The cessation profit that arises can, under certain conditions, be converted into what is known as a cessation annuity.
Plan een vrijblijvend gesprek en ontdek wat we voor je kunnen betekenen.
Plan een gesprekThis is a tax-efficient option: you defer the tax on the cessation profit by depositing the amount into an annuity product. The annuity premium is then deductible from the taxable cessation profit. The maximum amount you may deposit depends on your age and the size of the cessation profit. HMRC’s Dutch equivalent, the Belastingdienst, applies specific caps for this purpose.
Practical considerations at a glance
Want to be well prepared before proceeding with the conversion? At the very least, pay attention to the following:
- Map out your current pension accrual before the conversion.
- Check whether your annual allowance changes after the conversion due to your new salary as a director-shareholder.
- Find out whether a cessation event occurs and whether a cessation annuity makes tax sense.
- Consider whether you want to arrange your pension through an external insurer or through a private annuity.
- Record pension arrangements in the employment contract between you and your limited company.
- Bear in mind the customary salary requirement: this partly determines your tax allowance for annuity contributions.
Transfer without tax roll-over and pension
If you opt for a transfer without tax roll-over, there is no cessation event for tax purposes. The tax liabilities are carried over to the limited company. In that case, you cannot make use of the cessation annuity exemption, but you also do not pay tax immediately on hidden reserves or goodwill. The pension aspect therefore plays out differently here than with a transfer with tax roll-over.
This makes the choice between a transfer with and without tax roll-over particularly important when pension plays a significant role in your financial planning. A tax adviser can calculate and compare both scenarios for you.
Administration and tax advice for pension planning
Pension planning for director-shareholders is a specialism in its own right. The rules surrounding annuities, annual allowances, and pension insurance through the limited company are complex and change regularly. Sound administration is essential: ensure that all pension arrangements and contributions are correctly processed in the limited company’s annual accounts and in your personal tax return.
Why Belastingadviseur Eindhoven
At Belastingadviseur Eindhoven, we understand that converting your sole trader business to a limited company involves many loose ends, including pension and annuity matters. We are happy to work through the most tax-efficient approach for your situation with you — without complicated jargon and with a focus on what genuinely suits you.
Curious about what the conversion means for your pension accrual? Get in touch with no obligation and we will explore the options together.
Frequently asked questions
Can I simply carry my annuity policy over to my limited company?
Yes, an existing annuity policy is held in your name as a private individual and simply continues after the limited company is set up. However, your annual allowance may change, as it depends on your salary as a director-shareholder.
What is a cessation annuity and when is it worthwhile?
A cessation annuity is an annuity product into which you can place cessation profit in a tax-efficient manner. It is worthwhile in the case of a transfer with tax roll-over, as it allows you to defer the tax on the cessation profit. The exact amounts depend on your age and the size of the profit.
Can I still build up a pension with an insurer through my limited company as a director-shareholder?
Yes, that is possible. Your limited company then takes out a pension agreement with an external insurer and pays the premiums. Those premiums are deductible for the company. Following the abolition of pension held within the company, this is the most common route for director-shareholders wishing to build up a pension through their limited company.
Does my annual annuity allowance change after the conversion?
Most likely yes. As a director-shareholder, your income is the customary salary, which may differ from the profit you previously declared as a self-employed person. Your annual allowance is calculated on the basis of this income, so it is worth having it recalculated after the conversion.
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.
