15th Jun 2020
Tax, pensions and savings for UK Superyacht crew
Keeping your tax affairs in order and knowing what pensions you’re entitled to as a UK national can help you save money. Want to know how? Keep reading.
Updating your financial and tax information
Keeping your financial and tax affairs up to date will ensure you don’t fall foul of tax authorities in your country of residence and in the UK.
International rules, known as Common Reporting Standards, exist to ensure the banking industry is more open about sharing financial information with tax authorities across borders.
These global standards apply to locals and expatriates alike, which means you must be aware of where you need to declare your income and pay tax.
Not surprisingly, common reporting is a hot topic. Tax authorities will take action, including fines, against anyone who fails to declare bank accounts or pay tax. Tax avoidance isn’t worth the risk and will catch up with you, especially if you return to the UK after leaving the Superyacht industry.
Declaring your income
Unless you pay tax at the source – in other words, via your employer – you need to self-assess and declare your income to HM Revenues and Customs (HMRC).
Your declaration must include any end-of-season bonuses you receive. If you receive any large cash tips, you’re obliged to also include them when declaring your income. Declaring cash tips also means you have more money to invest.
The amount of tax you must pay is regulated by your tax location, which isn’t always the same as your nationality. If you are unsure of your tax location, speak to one of our experienced tax partners.
Paying tax and claiming the Seafarers Earnings Deduction
You must pay tax in the UK if you are:
- a UK employee, or
- a UK resident for tax purposes, and/or
- you own property in the UK from which you receive an income.
However, if you are a UK resident for tax purposes and are employed aboard a yacht operating outside UK waters, you may qualify for what’s called the Seafarers Earning Deduction, commonly referred to as the SED.
The SED is an allowance that helps UK taxpayers working in the Superyacht industry reduce their tax bill. It allows seafarers to claim up to 100% tax exemption on their earnings. In other words, it could reduce your tax bill to zero.
To be eligible for the SED, you must meet certain criteria. To start, you must be working onboard a qualifying vessel or Superyacht and also meet criteria related to the length of your contract and the number of days you spend at sea during the calendar year.
Applying for the SED can be confusing, which is why many crew members don’t apply. However, the SED is one of the best tax relief systems available, so it makes sense to understand it and apply for it.
To begin, familiarise yourself with these frequently asked questions about the SED.
When it comes to applying for the SED, our tax partner SK Tax Service can help. SK Tax is a tax advisory service specifically for seafarers including yacht crew.
Eligibility for a UK State Pension
Do you plan on retiring in the UK? If so, you may be eligible for a State Pension.
The State Pension is a regular payment from the government most UK nationals can claim when they reach State Pension age.
Not everyone gets the same amount. How much you receive depends on your National Insurance record. You will normally need at least 10 ‘qualifying years’ on your National Insurance record to get any State Pension.
These don’t need to be 10 years in a row, and you may be able to use time spent abroad to make up the 10 qualifying years, especially if you have lived and worked in:
- the EEA
- certain countries that have a social security agreement with the UK.
If you have a gap in your National Insurance record – that is, not enough qualifying years of National Insurance contributions – you may be eligible to make voluntary contributions. Again, there are certain criteria to meet.
The UK Government has outlined everything you need to know about your National Insurance record and your State Pension.
We appreciate it can be complicated, so if you’re still unclear contact SK Tax Service. They can, on your behalf, contact HMRC to ask for information about your National Insurance record. SK Tax charge a fee of £50 for this service.
Enrolling for a private pension in the UK
The State Pension is intended to make up part of your retirement income, not all of it.
Personal or private pensions are pensions that you arrange yourself. Your private pension contributions are tax-free up to certain limits.
There are different types of private pension schemes and they must be registered with HMRC to qualify for tax relief.
Using pensions to help build your savings
A State Pension and personal pension are great ways of building additional savings, especially if you plan to return to the UK in the future.
The advantage of having a personal pension is that the UK Government will grant you tax relief of 20% on the gross amount you contribute to your personal pension. Over time, this tax relief can add up to considerable additional savings for you.
Additional benefits of State and private pensions
Other good reasons for having a State Pension include giving you access to certain benefits such as Universal Credit and Jobseekers Allowance.
It’s easy to think you may never need to claim such benefits when you’re working aboard a yacht, earning a nice salary; however, the reality is the unexpected can happen. It’s best to be in a position to take advantage of tax benefits and other advantages where possible.
Additional savings options for UK Superyacht crew
Once you have your State Pension and personal pension plans sorted, there are several other options to consider for boosting your savings, including:
- having an emergency fund
- investing via platforms or investment bonds
- opening an Individual Savings Account
- investing in cryptocurrency.
Saving in an emergency fund
An emergency fund is just that: a fund for emergencies. By ‘fund’ we mean a stash of money you set aside as a financial safety net for when life throws you a curve ball. There are several good reasons for having an emergency fund:
- It can help lower your stress levels. It’s likely that when you’re faced with an unexpected change in circumstances, or even worse, job loss, you’re going to feel anxious. Having emergency cash on hand can help ease your anxiety.
- It can prevent you from spending your money on a whim. Don’t use your day-to-day bank account for your emergency money as it will be way too easy to spend. You will be surprised by how much you can save when money is moving automatically from your spending account to your savings account.
- It allows you to live securely without an income for a period, giving you time to get back on your feet and find a new income source.
Keep in mind it’s never too late to build your emergency savings. Have a look at your expenses and work out where you can cut back to start saving on a regular basis.
Investing via platforms or investment bonds
As independent advisers, we have access to multiple investment platforms and savings vehicles such as investment bonds.
Investment platforms give you access to ETFs, bonds and stocks while investment bonds are life assurance policies for the purposes of investment. Unlike standard life insurance policies that only pay out when you die, investment bonds are a form of investment from which you make a return.
Before recommending the most appropriate investment options for you, we take into account your nationality, your financial goals and your savings plan.
Depending on whether your savings plans are short term (0–5 years) or long term (5–10+ years), we will recommend a mix of investment platforms and savings vehicles.
Saving via an Individual Savings Account
If you are a UK resident, you can save tax-free with Individual Savings Accounts (ISAs). There are four types of ISAs, including a range of cash, stocks and shares and what are called innovative finance and Lifetime ISAs.
During the UK tax year, you can save up to £20,000 in one type of ISA or split the allowance across some or all four types of ISAs. The benefits are that you don’t pay tax on interest on cash in an ISA nor income or capital gains from investments in an ISA.
You must be a UK resident to open an ISA. Read more for a full overview of ISAs.
Dan Ward, explains further:
“Which ISA you choose to invest in will depend upon your needs and circumstances and it may well be that you utilise a combination of more than one type.
Frequently, clients will use a combination of pension and ISA to build up capital for the future. Pensions have the advantage that you can obtain tax relief on contributions up to a maximum of 100% of salary or £40,000 (whichever is lower) and you are currently able to take a 25% tax-free lump sum on retirement (although you are taxed on any income after this). The downside is that you are not able to access a UK pension until age 55, whereas with an ISA you can access all or part of it at any time and the proceeds are free of income or capital gains tax .
Whatever your needs, it is essential that you take professional advice to ensure that the outcome is the correct one for you, taking into account your attitude to risk, timescales and whether you are investing for income, growth or a combination of the two.”
Investing in cryptocurrency
Investing in cryptocurrency is another option for potentially boosting your savings. However, the crypto market is highly volatile and therefore high-risk. It’s critical you carry out your research before investing in cryptocurrency. The worst thing you can do is put your money into options you know little or nothing about.
We don’t normally advise investing in cryptocurrencies, but we are aware it’s of interest to some yacht crew. Our advice is to not invest based on the hype and noise. Be aware of the higher risks involved, do your homework and invest only what you’re willing to lose. In other words, if taking risks makes you nervous, don’t invest in cryptocurrency.
How this works in reality
Following is a short summary of how we recently helped a client to get his taxes in order to help boost and maximise his savings. For privacy reasons, we’ve not used his real name.
John Smith is a 30-year old Chef who wants to remain working in the industry long-term. His goal is to buy a house in England and retire there when he reaches 60.
To be eligible for a mortgage in the UK, John must be able to show UK tax returns. We worked with John to ensure he is fully compliant with UK tax laws and helped him apply for the Seafarers Earnings Deduction, which reduces his tax bill and increases the amount he can save.
To help John qualify for a State Pension in the future, we set him up to start making voluntary Class 2 National Insurance contributions. As a non-tax payer in the UK, he contributes the maximum amount of £2,880 per annum to his personal pension. In line with the rules, the UK Government tops up his personal pension to £3600.
Given John plans to buy a house and retire at age 60, he pays £4,000 per annum into a Lifetime Individual Savings Account (ISA) into which he receives an annual 25% bonus. He can continue paying into his Lifetime ISA until age 50 and will be eligible to withdraw from that account by age 60.
John has the option to contribute a maximum of £20,000 into his ISA during the UK tax year, which leaves an additional £16,000 per annum he can use to maximise his annual ISA allowance. £16,000 per year at 5% return over 30 years will result in approximately £1,395,215.
If, upon retirement, John withdraws 3% of the total amount each year as income, that equates to an annual income of £41,856. In addition, he will have access to his small personal and state pensions as well as his Lifetime ISA.
All of these actions maximise John’s tax efficient savings. In addition, John is expecting to receive a pay rise in the near future, so we will then be looking to pay extra money into an investment platform to further boost his savings.
Understand your savings goals and your tolerance for risk
The most important thing to be aware of when deciding where and how to save is to be clear about your financial goals. It’s always wise to seek advice before making a decision about where you are going to direct your savings and make investments.
Also, taking financial risks makes some people nervous while others are seize-the-moment types, who are willing to jump on opportunities.
Be honest with yourself on where you stand when it comes to taking risk as that will help you work out where best to save your money. After all, you work hard for it, so you want it to work even harder for you.
Get your financial affairs in order
We work closely with many UK Superyacht crew, so can help you navigate the often-complicated world of tax, pensions and savings.
If you’re looking for more specific advice about getting your tax and financial affairs in order, don’t hesitate to get in touch.