Income tax in France can be more complex than you might anticipate, for both residents and non-residents. From the different tax brackets to deductions and exemptions, navigating the rules and regulations can be a challenge. Here, we provide a short breakdown of what you need to know.
Since income tax is on our minds in May, thanks to the upcoming tax return deadlines, this seems an appropriate time to cover income tax in France – how it works and what expatiates need to know.
There are actually three forms of tax on income in France:
- Income tax on scale rates up to 45%, applied on earnings, pensions and rental income.
- Social charges up to 17.2% depending on type of income.
- A fixed 30% rate applies to investment income and gains.
Establishing your tax residence
Your starting point has to be to establish where you are deemed resident for tax purposes, since this is not always clear cut. You may think you should be paying your taxes in the UK when actually you meet the criteria to be a France tax resident, or vice versa. In today’s world of global exchange of information you need to get this right from the outset because sorting it out later can be time consuming, stressful and expensive.
1) Income tax scale rates
Income earned in 2022 will be taxed at the following progressive rates (i.e. these are the rates used for the tax return you complete this May/June):
|NET INCOME SUBJECT TO TAX||TAX RATE
|Up to €10,777||0%
|€10,778 to €27,748||11%
|€27,749 to €78,570||30%
|€78,570 to €168,994||41%
While this is the official table, 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.
The beneficial parts system
The parts system is probably the biggest differentiator between UK and French income tax. While income tax is calculated on the individual in the UK (and indeed in many other countries) here in France it’s calculated on the whole household. This avoids the higher rates of tax where there is a high income and more than one family member.
The family is divided into a number of parts familiales, based on how many individuals comprise the household. The total income earned that year is divided by the number of parts and the income tax scale rates 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.
2) 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 fund France’s health and social care.
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 health care 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.
For pension income they are 9.1% (though reduced to 7.4% for those on very low income). However, if you have Form S1 you do not pay social charges on your UK pension income.
The social charges on employment income add up to 9.7%.
3) Tax on investment income – the 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.
You can learn more by downloading our free Guide to Taxes in France.
What 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, you need to 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 gains are liable to tax in both countries, with a credit in France for 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.
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 with Blevins Franks 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. Our advisers 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.
Contact us today.