When you convert your sole trader business to a limited company, more changes than just your legal structure. Your pension accrual and annuity arrangements also undergo a significant shift. What you were used to as a sole trader suddenly works differently as a director-shareholder (DGA) — and those who are unprepared will miss out on tax advantages.
Pension accrual as a sole trader
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. The most common way to do this is through annuity relief: you deposit money into an annuity product (such as an annuity insurance policy or savings annuity) and deduct that premium from your profit. How much you may deduct depends on your annual allowance and any carry-forward allowance.
In addition, as a self-employed person or sole trader, you benefited from the retirement reserve (FOR) — or rather, you used to. Since 2023, the FOR has been abolished for new contributions. Existing reserves still need to be wound up, which requires attention when converting.
What changes after converting to a limited company?
Once you convert your sole trader business to a limited company, you become a director-majority shareholder (DGA). That may sound like a minor detail, but for your pension accrual it represents a fundamentally different position.
No longer entitled to annuity relief on profits
As a DGA, you no longer have taxable business profits — you receive a salary from your own limited company. The annual allowance for annuity contributions is henceforth calculated on the basis of that salary (and other sources of income), no longer on the basis of your business profit. This may mean your annual allowance changes, and it can sometimes be lower.
Pension via the limited company: a different route
As a DGA, you have three routes for pension accrual:
- In-house pension — this was previously possible, but has been abolished for new accrual since 2017. Existing entitlements have been wound up or converted.
- External pension via an insurer or premium pension institution (PPI) — your limited company pays premiums to an external party; this is tax-deductible for the company.
- Annuity from personal funds — you contribute privately into an annuity product and deduct the premium in your personal income tax return, based on your annual allowance as an employee/DGA.
Which route is most advantageous varies from one situation to the next. Always seek personal advice on this matter.
Plan een vrijblijvend gesprek en ontdek wat we voor je kunnen betekenen.
Plan een gesprekThe retirement reserve on conversion: what do you do with it?
Did you build up a FOR before 2023? If so, there is still a tax reserve on the balance sheet of your sole trader business. On conversion, you need to decide what happens to it. You can carry the FOR forward as part of the contribution (specific conditions apply for a tax-neutral transfer) or wind it up in advance by making an annuity deposit. If you do not handle this correctly, the reserve is released and you will still owe tax — without any tax benefit.
Practical points to consider during the transition
A conversion is the ideal moment to review your pension planning. At the very least, pay attention to the following:
- Calculate your new annual allowance after conversion, as it will be based on your DGA salary.
- Check whether your existing annuity policies or accounts continue as normal — this is generally the case, but verify the terms and conditions.
- Decide how to deal with any retirement reserve before the legal conversion takes place.
- Discuss with your tax adviser whether an external pension product through the limited company is more tax-efficient than a personal annuity.
- Bear in mind the customary salary requirement: the higher your salary, the greater your annual allowance — but also the higher your income tax liability.
- Consider a survivor’s pension or income protection insurance; as a DGA you are not automatically covered.
Making an annuity contribution at or after conversion
You can also make an annuity contribution from your sole trader business shortly before the conversion, provided you still have annual allowance or carry-forward allowance available. This can be tax-advantageous, particularly if you expect your annual allowance to decrease afterwards. Discuss the timing carefully with your adviser, as the order of steps in the conversion process partly determines what is possible from a tax perspective.
Why Belastingadviseur Eindhoven
A conversion affects more than just your legal structure — it affects your entire financial planning, including your pension. At Belastingadviseur Eindhoven, we not only think alongside you on the legal and tax aspects of the conversion, but also on what it means for your situation in the long term. Whether you have questions about your tax advice, your administration, or setting up a limited company: we are happy to help.
Feel free to contact us with no obligation. We would be glad to look at the best approach for your situation together with you.
Frequently asked questions
Can I still claim annuity relief after converting to a limited company?
Yes, you can. As a DGA, you are still entitled to annuity relief in your personal income tax return, based on your annual allowance. However, that annual allowance is calculated on the basis of your DGA salary, no longer on the basis of your business profit. The amount you can deduct may therefore change.
What should I do with my retirement reserve (FOR) on conversion?
If you still have a FOR on your balance sheet, you need to address it before or during the conversion. You can convert the reserve into an annuity to defer taxation, or allow the reserve to be released — but in that case you will pay tax immediately. Seek advice on this before initiating the conversion.
Is it compulsory to build up a pension through my limited company?
No, as a DGA you are not required to build up a pension through your limited company. You are free to opt for an external pension product, a personal annuity, or a combination of both. It is, however, sensible to make a considered choice, as a DGA does not automatically accrue a pension.
What happens to my existing annuity policy when I convert to a limited company?
An existing annuity policy or savings account remains in your name and continues as before. In most cases, the conversion of your business has no direct impact on it. However, the basis for future contributions and tax relief will change.
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.
