A major change to how pensioners living in France declare their income may come into effect next year as part of the 2026 budget.
French Prime Minister François Bayrou outlined several planned changes to help France save €44 billion in next year’s budget to reduce the national deficit.
Alongside abolishing two public holidays and freezing public spending, Mr Bayrou announced plans to cancel the abattement fiscal des retraités - or 10% allowance - that applies to pensioners declaring income in the country.
The move could replace the allowance with a lump sum reduction on taxable income.
Cancelling the measure will help save billions of euros. However, it could also push certain households into a higher income tax bracket – which will be frozen at 2025 rates under Mr Bayrou's proposals – leading them to pay income tax when they were previously exempt.
Calls to remove this allowance have been made since the start of the year, but the measure was officially announced on Tuesday (July 15) when Mr Bayrou outlined his budget plans.
Whether his budget will pass is another matter.
What is the tax allowance?
This flat 10% allowance was first introduced in 1978 by then-French President Valéry Giscard d'Estaing.
Meant as a way to reduce the tax burden on retirees, it levelled the position between pensioners and salaried employees, with the latter group also receiving an automatic 10% reduction on taxable income through their job.
It also applies to disability pensions and those paying child support.
For retirees, this 10% allowance is applied only to pensions and not to income from other sources, such as rentals, etc.
Beneficiaries do not have to do anything to apply the allowance to their income tax declaration as it is done automatically by French tax authorities after they receive it in the spring.
Currently some 14.9 million people in France benefit from the allowance.
Although the reduction is still commonly known as a 10% allowance, this is a misnomer. It currently has a cut-off point of €4,399 per household (foyer), not per individual.
After this amount, it no longer applies.
Once the final figure from the 10% reduction is known (or the €4,399 ceiling is reached), it is deducted from the taxable amount of a household’s income.
If the final figure is higher than the first income tax bracket (in 2025 and presumably 2026, €11,498), they are then taxed 11% on amounts over this sum up until the next income bracket etc.
Note that income tax does not always begin being levied on income above this rate, as several other exemptions and allowances may be applied depending on the status of the individual and household.
Roughly half of all households do not pay any income tax aside from the amounts deducted at source.
What do the changes mean?
The government’s plan will replace this allowance with a flat €2,000 reduction sum.
This would apply per-individual as opposed to per-household. Previously, French media reported it would apply to the latter.
In practice, this is €2,399 less than the current allowance however in an example where two pensioners live together, the two combined limited (€2,000 x 2) would only be €399 less than the current threshold.
Some pensioners would see an improvement due to the system, as the €2,000 lump sum reduction per-person is higher than the 10% allowance per-household they currently receive, meaning they formerly paid some income tax but would now no longer need to.
Pensioners with an income of around €20,000 per year or less will remain unaffected and not pay any income tax, according to current predictions.
However, many other households will end up paying tax under the new plans despite currently being exempt.
The exact number of residents who will begin paying income tax under the plans has not been revealed by the Finance Ministry as several other factors will affect this final sum, including whether the retiree lives alone, with another pensioner, or with a working person.
Higher-income retirees may end up paying more tax under the plan, as a higher amount of their income could be placed in upper tax brackets.
How are foreign retirees impacted?
The change will apply to all retirees who declare their taxes in France (if this is where they are tax resident).
This includes non-French retirees who live permanently in France, including UK and US citizens.
Information on all income must be stated on your annual declaration, including overseas income such as pensions.
However, this does not necessarily mean residents are taxed on this amount as there are tax treaties are in place between France and several other countries (including the UK and US) to ensure no double taxation on the same income.
Non-French retirees declaring their income in France currently benefit from the 10% allowance, and will therefore also receive the €2,000 lump sum deduction.
The government did not announce any planned changes to how income for pensioners is taxed aside from replacing the 10% allowance with the €2,000 lump sum.
