Paying your way
Paying tax on income is an inevitable part of life wherever you live. Rob Kay explains the essentials for those living in France
If you are living in France or are moving there soon, you need to familiarise yourself with the French tax regime and understand how it impacts your personal situation. You need to be informed on capital gains tax, wealth tax, succession tax and local property taxes, but the starting point for most people is income tax.
If you are resident in France for tax purposes, you are liable to French tax on your worldwide income. You need to follow the domestic tax residency rules, as well as the UK ones if you retain ties or spend time there. You become tax resident from the day you arrive if you intend to stay permanently or indefinitely. France uses the ‘split-year’ approach, so you can be non-resident for half the year and resident for the rest.
Note that you do not have a choice; you either are, or are not, French tax resident under the rules. If you are, it is your responsibility to make yourself known to the French tax authorities and to fully declare your income, capital gains and wealth.
Taxes are declared and paid a year in arrears, so income earned in 2017 is declared on your tax return due by the end of May 2018. The tax can be paid in three equal instalments or 10 monthly instalments.
There are two forms of tax on income and gains: Income tax on scale rates – most income, including earnings, pensions, rental income and investment income – is taxed at progressive scale rates. Social charges – paid in addition to income tax. In France the total income of a household is assessed; husband and wife are not taxed separately. A family is divided into a number of parts familiales, including children (half part for the first two children). The total income is divided by the number of parts. The income tax scale rates are then applied to this lower figure and, having computed the income tax due, it is multiplied back up by the number of parts. This helps avoid the higher rates of tax, though there is a maximum benefit that a household can receive.
Income tax rates are usually only set at the end of the tax year to which they relate. The rates for 2016 income are:
Higher earners have to pay surtaxes as follows: Single person with income between €250,000 and €500,000 per part – 3% Single person with income exceeding €500,000 – 4% Family with income exceeding €500,000 – 3% Income exceeding €1,000,000 per part (individual or family) – 4% A 20% income tax reduction is being introduced for taxpayers with low income up to €18,500 for individuals and €37,000 for couples. For those earning up to €20,500 (individuals) and €41,000 (couples) a scale rate mechanism is being introduced. These limits increase by €3,700 for each additional half part for dependants.
Bank interest, dividends and capital gains made on the sale of shares are added to your other income for the year and taxed at the scale rates of income tax above.
There is a big difference in France between income and taxable income. If you arrange your investments to produce non-taxable ‘income and gains’, this can make a significant difference to your tax bill.
Pensions are taxed at the progressive scale rates. The taxable base consists of income net of social security contributions, less a 10% deduction of a minimum of €379 and a maximum of €3,711 per household per year (for 2015 income).
UK government service pensions remain taxable in the UK and are not taxed directly in France. However the income has to be included as part of your taxable income and a credit equal to the French income tax and social charges that would have been payable is given. This applies even if no actual tax is paid in the UK.
Annuities and QROPS can receive more beneficial treatment but you need to seek personal advice.
Pension lump sum payments are taxable in France. They are taxed at the income tax scale rates. You can, however, opt for a fixed income tax rate of 7.5%. This is available only if the pension contributions were deductible from your or your employer’s taxable income, and the whole pension fund is taken at once.
A PAYE system is due to be introduced in 2018
France does not currently have a Pay-AsYou-Earn (PAYE) system for employees, but one is due to be introduced from January 2018. This will apply to employed and self-employed individuals as well as those receiving French pension and French unfurnished letting income.
If you are self-employed your income is taxed under one of two regimes, the BNC ( bénéfices bon commerciaux) regime for all forms of non-commercial income, or the BIC ( bénéfices industriels et commerciaux) regime which applies to commercial and more.
There are deductions that can be made from your gross income before tax is calculated, such as social security contributions, pension contributions, a 10% deduction in lieu of employment-related expenses (with minimum and maximum deductions), etc.
INCOME TAX DEDUCTIONS
Individuals over the age of 65 (or who hold an invalidity card or receive a military pension) are entitled to a tax-free allowance of €2,347 (for 2016) where their total household income is up to €14,730 and €1,174 for income of between €14,730 and €23,730. The allowances double for a married or PACS couple where both fulfil the conditions.
If your taxable income is below €1,553 (€2,560 for a couple), a tax credit known as the décote will reduce your tax liability.
Various tax credits are available, which are deductible against the actual tax. Some of them are given on a cumulative basis, and the maximum credit that can be received is €10,000 of the global net taxable income of the household (before the scale rates are applied).
Social charges are an additional tax levied on income and capital gains. They are calculated based on the income declared in your tax return. Social charges are made up of five elements, and the combined rates are as follows: Salaries and unemployment benefits (on 97% of gross): 8% Retirement or disability pensions, including lump sums (on 95% of gross): 7.4% Investments, annuities, rental income, capital gains and interest: 15.5%
Pension income escapes social charges if you are not affiliated to the French health system (this is generally the case if you hold Form S1).
This article can only outline the basics of French income tax. Note that at the time of writing, the budget for 2017 had not yet been finalised. It is important to seek personalised, professional advice, particularly if you are looking to lower the tax liabilities on your savings, investments and pensions. French tax may be high, but it does present opportunities for effective tax planning if you work ahead and take specialist advice.
Rob Kay is senior partner at Blevins Franks blevinsfranks.com
* The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.