We are in May again, which means the deadline for submitting our annual income tax return is fast approaching.
Avoid leaving it to the last minute – if you earn income from a variety of sources, and/or from abroad, it can sometimes get a little complicated.
This is therefore a good time to take a look at how income is taxed in France.
While both the UK and France impose an income tax, they do not work the same way.
Follow the local rules and France/UK double taxation treaty carefully, both when submitting your tax returns and for your tax planning arrangements generally.
There are three forms of tax on income:
- Income tax on scale rates (on earnings, pension income, rental income)
- Social charges
- A fixed rate on investment income and gains
Income tax rates
The income tax rate bands and scale rates for net income received in 2021 are:
Up to €10,225 - nil;
€10,226 to €26,070 - 11%;
€26,071 to €74,545 - 30%;
€74,546 to €160,336 - 41%;
Over €160,336 - 45%.
Income above €250,000 and €500,000 can be liable to an extra 3% or 4%, depending on whether you are a single taxpayer or family.
Allowances and tax credits
Individuals aged over 65, or holding an invalidity card, or in receipt of a military pension or accident at work (minimum 40%) are entitled to a €2,484 allowance for income up to €15,560, and €1,242 for income between €15,561 and €25,040.
While retirement and disability pensions, child support and alimony are taxed the same as salaries, the taxable base benefits from a 10% deduction, with a minimum of €400 and maximum of €3,912 per household for 2021 income.
Various tax credits are available, which are deductible against the actual tax payable (and not against the income).
The rules can be complicated so ask your accountant to determine which credits are available for your circumstances.
France’s pay-as-you-earn system only started in 2019 and was a complex tax reform.
Income subject to PAYE includes employment income; taxable state benefits; pensions and lifetime annuities; non-French income taxable in France; rental income; and business profits.
Income excluded from the PAYE system includes investment income; capital gains on the sale of property and capital investments; and non-French income subject to French tax credit under a double tax treaty.
France’s household/parts system
This is a big difference from the UK.
In France, income tax is levied on the total income of the household (including minors), rather than on individuals or spouses.
This can prove very beneficial for some families where one member earns a high income (within limits).
To avoid higher rates of tax, the family is divided into a number of parts familiales.
The total income is then divided by the number of parts and the income tax rates applied to this lower figure.
The computed income tax due is then multiplied by the parts to provide a larger number.
The number of parts depends on family circumstances and dependent children.
For example, a married couple’s income would be divided into two parts, with an additional half part for each of the first two children, and a whole part for the third and subsequent children.
This is another big change from the UK.
Social charges are levied on all forms of income and are in addition to income tax or the social cotisations paid by the self-employed towards their healthcare and pension etc.
They are comprised of six elements, which amount to the following charges:
Earned income (salaries, unemployment benefits) – 9.7%;
Pensions (retirement or disability) – up to 9.1% (only payable on foreign pensions if you are subject to the French healthcare system. UK retirees with Form S1 for their healthcare therefore escape this charge);
Unearned/investment income (interest, capital gains, annuities, rental income, etc) – 17.2% (this is reduced to 7.5% if you are covered under the health system of another EU/EEA country or of the UK, eg. UK retirees with an S1).
Your social charges are usually calculated based on the income declared in your income tax return.
The French authorities notify you of the amount payable in the autumn, along with your income tax liability demand.
Tax on investment income
Investment income is currently taxed at a fixed rate of 30% rather than the scale rates of income tax.
This includes both tax and social charges, so is beneficial for higher investment income.
Households in low-income brackets can opt for the progressive income tax rates (plus social charges).
Unless you are a low-income household, you need to declare interest or dividends received from abroad within 15 days of the month end and pay the 30% tax.
French tax residents are liable to local tax on worldwide income and gains, so you must declare all earnings outside France.
You do not, however, pay tax twice on income taxed in the UK.
Under the terms of the double taxation treaty, UK government service pension and rental income are taxable only in the UK.
However, you must still declare this income on your French tax return (you will receive a credit equal to the French income tax and social charges on the income).
France might only be a short hop away from the UK, but its taxation system can feel a world apart.
You need to understand how it works and follow the rules correctly, so take professional advice.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our, Blevins Franks, understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.