I’m not a financial advisor, and would recommend that anyone reading the below information researches it fully or consults a registered financial advisor or tax advisor to ensure that they are getting accurate information.
It’s very easy to lose sight of your finances as a seafarer, but if you’re employed and paid from an offshore company you need to be aware of the requirement to submit a ‘Self-Assessment’ on an annual basis, and failure to do this can cause you a great deal of trouble. It could be embarrassing to explain to your employer that you can’t embark on your next voyage because you are in court for tax evasion.
Seafarer Earnings Deduction
It is your responsibility to declare your earnings, however you may be eligible to a tax advantage of the ‘Seafarer Foreign Earnings Deductions’ or SED for short.
In very broad terms, the seafarers’ FED concession means that the income of anyone employed on a ship is free of UK income tax provided they spend at least half the days of a qualifying period of at least 365 days outside the UK and not more than 183 consecutive days in the UK during that period. Location (inside or outside the UK) is measured at midnight for each day and a day counts as spent outside the UK if it forms part of a voyage to or from a foreign port.
In 1991 following the Falklands war, it was realised by the Government of the day that there was a strategic case for measures to encourage shipping companies to draw their crews from seafarers in the UK, who would be willing and able to serve in time of war, and to this end relaxed the rules giving tax relief to seafarers working mainly overseas.
The Seafarers’ Earnings deduction is a 100% relief from tax on your earnings as a seafarer if your job entails working outside the UK. A brief summary of the rules are as follows:
- You can qualify for the Seafarers’ Earnings Deduction as a seafarer if you perform all your duties on a ship, or you perform most of your duties on a ship and the other duties are incidental to the duties on the ship.
- The word ‘ship’ is not defined in tax law, but ‘offshore installations’ used in the offshore oil and gas industry are specifically identified and are not regarded as ‘ships’ for the purposes of the Seafarers’ Earnings Deduction. These include:
- fixed production platforms
- floating production platforms
- floating storage units
- mobile offshore drilling units (both semi-submersibles and jack-ups)
HMRC’s new guidelines published February 2009 regarding offshore installations go further to include those vessels that are being put to a ‘relevant use’ and at the same time are ‘standing or stationed’. See HMRC EIM33193 and HMRC EIM33109 for definitions of ‘relevant use’ and ‘standing or stationed’.
- SED can only be claimed by seafarers’ who are resident/ordinarily resident in the UK.
- SED is allowed against earnings as a seafarer that fall within a Qualifying Period, and includes leave pay immediately following a Qualifying Period.
- The Qualifying Period must be 365 days or more and must not contain more than 183 consecutive days in the UK. At the end of each period outside the UK, the total days spent in the UK must be less than half the total days in the Qualifying Period. The Qualifying Period must start and end with a day outside the UK.
- In each tax year, there must be at least one foreign port visit for each employment.
- A day of absence from the UK is one where you are outside the UK at midnight.
- You can include holidays abroad to make up the Qualifying Period.
There is a lot of guidance on the HMRC website to help you determine whether you are eligible and how to prepare a self-assessment.
You can also use companies such as Seatax Ltd, SK Tax or Blue Riband Tax.
What is absolutely critical for claiming the tax relief is proper record keeping, the onus is on you to prove that you are eligible, and if you aren’t, then you could be forced to retrospectively pay tax on your income. If you are away at sea, make sure that someone at your registered address keeps all your mail on a safe place to ensure that you have the correct documents. Before signing off a ship, photocopy the freeboard pages of the official logbook.
I would highly recommend starting a spread sheet with details of where you are every day and what dates you are in the UK, a simplified diary of sorts.
Keep the following documents:
- air tickets or other travel vouchers, boarding passes
- hotel bills or other receipts
- passports and visas
- seafarer’s discharge book
- freeboard logs of the ships you carried out duties on
- Salary statements
You do not need to submit these documents with the tax return, however a certain percentage of applications are investigated. Your case could be randomly investigated and you should submit be able to readily submit these.
You also need to be aware that as a seafarer you can pay National Insurance contributions. If you want to be eligible for a Full State Pension, you can voluntarily make payments. See the below link.
Stocks, Shares and Trust Funds – Invest using an ISA
ISAs are tax favoured savings and investment accounts. You can use them to save cash, or invest in stocks and shares. The maximum you can put in to an ISA is £11,520 in the tax year 2013-14, up to £5,760 of which can be saved in cash.
You don’t pay any tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax. But this does mean that you can’t use losses on ISA investments to reduce Capital Gains Tax on profits from investments outside the ISA.
If you wish to invest, weather its earning interest on cash or investing in the stock market or funds, then even as a seafarer you can do that within the wrapper of an ISA. Making your investments within the ISA mean that any interest or dividends that you receive below the ISA threshold will not be taxable and you will not even have to declare them which will heavily simplify your ‘Self-Assessment’ Tax return.
Alternatively you can also invest in Premium Bonds, and also gain tax relief on the returns/winnings that you may obtain, whilst also not having to declare this on your Self-Assessment.
You can invest in a rental property and avoid tax on the earnings that you receive in the rental income. Whilst you are claiming the foreign Seafarer Earnings Deduction, you still have your personal tax free allowance of 8105 pounds (2012-2013) or 9440 pounds (2013-2014) on the income. You may also be able to offset the tax liability against the interest paid on your mortgage repayments in addition to deductions for allowable expenses.
What happens if you don’t pay tax?
If you don’t pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20 per cent) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600. There is no tax relief for contributions above this amount.
Essentially this means, that by investing into a pension 80 pounds, the government will add an additional 20 pounds of tax relief, even though you don’t pay tax. If your company offers you a pension where they will match your contributions to a certain level, then you are effectively getting a pay rise by accepting this. Even by investing a small amount, over a long period of time you have gained additional income for your retirement.
It is recommended that you whenever you get a pay rise or promotion, you put 50% of the promotion into savings or a pension, and you will never notice the difference in your wages.
Foreign Earnings Deduction
3.28a Individuals qualifying for the 100% foreign earnings deduction, which applies to certain employees working outside the UK (seafarers only from 17 March 1998), are still eligible to contribute to a personal pension scheme for any tax year in which they have relevant earnings chargeable to UK income tax.
Contributions are paid net of basic rate tax, and are limited to the higher of the earnings threshold and the relevant percentage of net relevant earnings from a basis year, in the usual way (see paragraphs 4.9 and 4.10).
Any questions concerning an individual’s liability to UK tax should be addressed to the Tax Office dealing with that individual’s tax affairs.