It is important to understand how your UK pensions are taxed when living in France. In fact, you may have tax considerations in both countries.
We work hard to build up our pensions for a secure and enjoyable retirement; to be able to do all those things we didn’t have time for before and have peace of mind about our future. But while our pensions feel like our money, money we set aside for retirement, they are still liable to income and other taxes.
Here we look at a few issues you need to be aware of.
How UK pension income is taxed in France
Pension income from UK funds is generally taxable only in France, after a 10% deduction (maximum €4,123 per couple), at the scale rates of income tax. These currently range from 11% for income over €10,778 to 45% for income over €168,994. France additionally applies 9.1% social charges (reduced to 7.4% for low pension income) but Form S1 holders are exempt.
Income from UK government service pensions remains taxable in the UK (and not France). You still include it on your French income tax return, but receive a credit equal to the French tax and social charges.
This is one tax trap many Britons moving to France fall into. The UK rules allow you to take a 25% ‘pension commencement lump sum’ tax-free. But if you take this lump sum after becoming a resident in France, it will be liable to French income tax (up to 45% remember) and potentially social charges. If you haven’t left the UK yet, you’ll want to think about this now.
If, however, you are considering taking your entire pension as one lump sum, in certain circumstances you may be eligible for a fixed 7.5% income tax rate in France. This can present opportunities – re-invest the capital into a tax-efficient arrangement in France and pay less tax overall. But first carefully consider if such a move would be suitable and safe for you.
The UK has frozen income tax thresholds until 2028. Therefore, if you are paying UK income tax on your pensions, it is likely that more and more tax will be taken over the next five years.
On a positive note, however, the UK’s 2023 budget abolished the pensions lifetime allowance and resulting 25%/55% tax charges – very welcome news for those who have built up larger pension savings over decades of contributions and growth.
This is not necessarily permanent, though, as a future government could reverse this move, and the Labour Party quickly pledged to do so.
There may therefore be a limited opportunity to transfer your pension out of the UK and avoid any future lifetime allowance charges. Blevins Franks can review your funds to establish if this would be a suitable option for you.
UK tax changes ahead?
The Institute for Fiscal Studies (IFS), a UK economic think tank, published a controversial report in December 2022 recommending that UK pensions should be liable to income and inheritance tax when the scheme member dies. Currently, pensions escape UK inheritance tax and income tax is not payable when the holder dies before age 75.
The IFS is calling for basic rate income tax to be applied to the remaining pension funds on death regardless of age – which would generate a new source of income for the government – and for the pension to be included in the value of the estate for inheritance tax purposes. It estimates that applying inheritance tax to pensions could raise £1.9 billion of revenue for the exchequer (though it does suggest this could be used to reduce the overall IHT rate from 40% to 30%).
Whether the IFS proposals are accepted or ignored, this highlights the fact there is £3 trillion sitting in UK money purchase pensions and a potential target for HM Treasury. If you have left the UK permanently, do you want to leave such a valuable asset at the mercy of the UK government? Moving your pension out the UK now could protect you from future costly tax reforms. As always, though, take regulated personalised advice to ensure you don’t put your retirement savings at risk.
Download the free Blevins Franks Guide to Taxes in France.
Reviewing your pension arrangements
If you are a resident of France and have a UK pension you do need to review your pension arrangements and establish what is best for your current and future circumstances.
Pensions are not always set in stone, like you, they might benefit from moving abroad, and you need to regularly review your objectives. That could mean changing your investment profile, reassessing your risk tolerance, or developing an alternative strategy that embraces your overall financial situation.
Far too often pension decisions are taken in isolation based on options provided by UK pension companies who are oblivious to your needs and the tax implications of living in France.
Contact Blevins Franks for personalised advice. We provide integrated advice covering pensions, investing, and cross-border tax and estate planning for both countries. Our local advisers work with our pension and tax specialists to determine the best solution for each client, on a range of pension opportunities.
Contact us now.