Avoid income tax return errors by understanding the French system

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Looming tax return deadlines mean income tax is on many people’s minds, so it seems timely to cover how it works and what expatriates need to know.

There are actually three forms of tax on income in France:

1. Income tax on scale rates up to 45%, applied on earnings, pensions and rental income

2. Social charges up to 17.2%, depending on type of income

3. A fixed 30% rate that applies to investment income and gains

Tax residency

Your starting point has to be to establish where you are deemed resident for tax purposes, since this is not always clear-cut. 

In today’s world of global information exchange, you need to get this right from the outset. 

Sorting it later can be time-consuming, stressful and expensive. 

Income tax scale rates 

Income earned in 2022 will be taxed at the following progressive rates (ie. these are the rates used for the tax return you will complete this May/June):

  • Up to €10,777: 0%
  • €10,778 to €27,748: 11%
  • €27,749 to €78,570: 30%
  • €78,570 to €168,994: 41%
  • Over €168,994: 45%

Additional taxes are applied on ‘high income’. 

A single person will generally pay an extra 3% on income over €250,000 and 4% for income over €500,000.

For families, the thresholds are increased to €500,000 and €1,000,000 respectively.

A quotient mechanism reduces the effect of the high tax when income exceptionally exceeds the threshold.

Various deductions and tax credits are available, so make sure you are using all the ones you are entitled to.

Read more: When is the deadline for filing your French tax return?

The beneficial parts system

The parts system is probably the biggest difference between UK and French income tax.

While income tax is calculated on the individual in the UK (and indeed in many other countries), in France it is calculated on the whole household.

This avoids higher rates of tax where there is a large income and more than one family member.

The family is divided into a number of parts fiscales, based on how many individuals the household is made up of.

The total income earned that year is divided by the number of parts and the income tax scale rates are applied to this lower figure.

Once the tax is calculated, it is multiplied back up by the number of parts to provide the due tax.  

Social charges

Social charges are paid in addition to income tax and, in fact, now raise more revenue than income tax. 

While they are different and separate to social security contributions, they do help to fund France’s health and social care.

The social charges on employment income add up to 9.7%. 

For pension income, they are 9.1% (though reduced to 7.4% for those on very low incomes).

However, if you have an S1 form, you do not pay social charges on your UK pension income.

Social charges on investment income are either 17.2% or 7.5%.

The general rate is 17.2%, but if you have an S1 or are covered under the healthcare system of another EU/EEA country, the charges applied to investment and property income are reduced to 7.5% (in other words, you only pay the 7.5% prélèvement de solidarité charge).

This continues to apply to UK nationals even post-Brexit.

Tax on investment income – prélèvement forfaitaire unique (PFU)

Investment income, such as interest, dividends, capital gains and gains from life insurance policies/non-French assurance vie, is taxed at a fixed rate of 30% rather than the scale rates of income tax.

This is inclusive of both tax and social charges.

Households in low-income brackets can opt for the progressive income tax rates (plus social charges) so they are not taxed more under this system.

Read more: How to check your investments stay on track for life in France

What do you need to declare and pay tax on in France?

French tax residents are liable to French income tax on their worldwide income and gains.

You need to declare all income you earn outside France, whether it is pension, rental or investment income.

However, follow the France/UK double taxation treaty to establish where any income earned in the UK by a French resident is taxed. 

You do not pay tax twice on income taxable in the UK, such as  UK government service pension and rental income.

However, you must still include it on your French tax return.

You then receive a credit equal to the French income tax and social charges.

Real estate

Real estate gains are liable to tax in both countries. You will receive a credit in France for any UK tax paid.

Gains made on the disposal of capital investments are generally taxed in the country where the seller is resident.

Residents of France are also obliged to declare all their foreign bank accounts and non-French life insurance policies, even if you do not earn an income or they are dormant.

This is done when you submit your annual tax return, using a separate form.

Read more: Income declarations in France: Key points on overseas bank accounts

Non-residents of France need to submit a tax return listing all income earned in France (eg. rental income).

Take personalised, specialist cross-border advice to confirm your tax-residence status and what taxes you are liable to in France.

Getting it right early on will give you peace of mind that you have declared everything you should.

Your adviser can also guide you on the most tax-efficient way of holding your assets in France, so that you do not pay any more tax than you need to. 

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon 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.

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