Your legal structure is a critical business decision that has both short-term and long-term consequences.
It’s a decision that everyone faces when starting a business for the first time. And that’s whether to operate as a sole trader or as a limited company.
It’s difficult to answer this because it’s subjective and your decision needs careful consideration.
That said, there are pros and cons to each and a good accountant can help you determine the most appropriate set up for you.
However, most of the factors that people use to decide are between the operational differences of the two and their respective reporting obligations.
But there is one very important difference that gets overlooked when this decision is being made and the difference it makes to your future can be substantial.
Retirement planning rarely gets much of a look in because it’s a long-term issue whereas starting a business is more short term focussed.
Generally speaking, it’s much easier to trade as a sole trader rather than a limited company but you shouldn’t be using this as your driving factor.
Informed decisions are their own reward so make yours with all the relevant information.
What You Can Do v What You Can Have
PAYE workers and Company Directors have different entitlements based on entirely different funding models.
The sole trader model on a defined contribution model.
This means you can get a specified amount of tax relief on contributions up to a maximum limit based on your income and your age.
The directors on a defined benefit system.
The Revenue Commissioners provides a formula that uses six variables to calculate your maximum benefits.
These formulas allow directors to build towards predetermined targets specific to their unique circumstances.
But, leaving aside the fact that you can fund substantially more through a directors pension, the real clincher is the fact that the business pays for it entirely.
Director pension contributions are a legitimate business expense, whereas personal contributions are not.
Aside from that, company directors can also exercise large, one off contributions from the business. This can be done where previous funding was short of target or non-existent.
It allows them to play ‘catch up’ and make up for lost years, which is a significant advantage and one that nobody else can do.
But, even if you’re not into pensions, a director can still avail of standalone tax-free cash.
Here, they could instruct their business to fund up to 18 month’s worth of their final salary up to €200,000.
This is a nice option to ensure you don’t walk away empty-handed.
Your time is important, and each year counts towards your entitlements as a director, which is why your set up decision is so important.
You can see all of your options as a director laid out for you using our calculator.
I’m self-employed now. Should I change?
Well, that depends.
If, for example, you’re approaching 50 then this might be a good time to sit down and look at your options.
Adjusting your status could see you set up and trading as a limited company by age 55. This would enable you to complete the 10 years needed to fund at the maximum rate.
What else should I consider?
The key element for director pension planning is consistency in both time and income. Your time counts so here are some other lifestyle things to consider if you are thinking of making the switch;
1. Is this the work I want to do for the rest of my career?
2. Will I be able to maintain a consistent level of income until then?
3. Do I have excess income being taxed at the higher rate that I don’t need right now?
4. Has retirement planning become a priority?
5. Is the tax free cash option something I’d like to have?
How much time do I need as a director?
You need 20 years’ service to maximise the tax free cash option.
But you only need 10 years for the maximum allowable pension fund based on Revenue funding limits.
Aside from the obvious wealth building capacity, a limited company protects the founder’s personal assets if the business fails.
Many self-employed people have professional indemnity cover in place but these only cover your liability up to a set limit.
A limited company offers complete protection from failure and creditors.
This could make all the difference if things go bad or if there is a litigation risk to the work you do.
That’s because it operates as a separate and legally distinct entity from you.
How can I find out more?
Pensions are complicated and most people find them a challenge, so we’ve built an online advisor to make them easy for you.
This way you can see how the numbers work in your exact situation, regardless of how you’re set up.
It calculates your pension potential based on the aforementioned limits, your rate of tax relief, relief weighting via the tax bands and all the relevant funding formulas for company directors.
All you need to do is fill in your details and change your status from ‘self-employed’ to ‘company director’.
This allows you to do a comparison and to see the difference for yourself.
I can help you with this so get in touch today if you want a confidential, no obligation chat about your situation.
You can get me at 01 4423929 or email@example.com
2019 Business All-Star (Pensions and Retirement Planning)