Taxation of Pensions in France Made Simple
Are you a UK or overseas pensioner living in France? Did you know that you may be liable to pay French tax on your pension income? In this blog post, we will explain how the French tax system works and look at some of the ways that you can reduce your taxable income. So, whether you are a retired expat living in France or are about to retire and move to France, read on for all the information you need!
The French tax and pension laws are complex, so it’s essential to seek up-to-date advice from an international financial or a certified public accountant. Make sure that you use one of the reputable firms that can help with both your local law as well as those found in France!
Is my pension subject to tax?
Firstly, as a French tax resident, all global income, including your UK or overseas pension, may be liable to tax.
Upon becoming a French resident, all overseas income and investments must be declared on your annual tax return. A pension payment includes a lump-sum pension as well as a monthly, quarterly, or annual pension income. It doesn’t mean that all of this income will be taxed or that it will be taxed twice, however. Many countries, including the UK, have double taxation agreements with France to prevent this.
Tax on pensions in France
In France, pensions are subject to income tax after the deduction of a 10% allowance per household (capped at €3858 based on 2021 figures). After you pass your tax-free allowance (€10,084 based on 2021 figures), income tax rises to 11%, rising to 45% for high-income earners.
The French tax system is based on the fiscal household rather than the individual, so married couples must file joint tax returns. Married couples count as two units, married couples with children as 2.5 units, etc. The tax scale and tax-free allowance are then calculated based on the number of units in the family. One important point to note is that widows over 74 are also granted an additional 0.5 units (and are therefore deemed 1.5 units), which offers tax reductions.
UK or overseas state, government, or military pensions
There are some state, government, and military pensions that are taxed at source, meaning that the tax is automatically deducted in the country of origin before the pension payment is made. All UK government service and military pensions, for example, follow the same principle. Pensions are not exempt from taxation in France, however, so you must declare them and pay taxes.
You may be able to apply for tax relief for some state pensions in order to pay your taxes in France. You may also receive a tax credit that will be offset against your French taxes (see How to Pay Tax on My UK Pension in France for more information).
Unlike pensions from many other countries, American pensions received by retirees in France, including 401K and IRA plans, will be taxable in the United States under the France/United States double tax treaty. In France, your pension will not be taxed; however, you must still declare your US pension income on your annual French tax return.
French residents are subject to two types of income taxes: income tax (as described above) and social charges (prélèvements sociaux). These fees differ slightly from those imposed on employees and employers, but they apply to income sources such as investments, rentals, and capital gains, as well as pensions. Unless you have an exemption, the following will generally be charged on your pension for expats and will grant you access to the French healthcare system:
- La contribution sociale généralisée (CSG) at a rate of 8.3%, 6.6%, or 3.8%, depending on your income.
- La contribution pour le remboursement de la dette sociale (CRDS) at a rate of 0.5%.
- La contribution de solidarité pour l’autonomie (Casa) at a rate of 0.3%
The rates shown above are based on 2022 (2021 income) rates and represent a total of 9.1% social charges levied on your pension.
EU or UK retirees receiving a state pension who have an S1 form are an exception. In this case, your pension income is exempt from social charges, and you can use your S1 form to join the French healthcare system.
Lump-sum pension payments
Many French residents receiving a foreign pension may be able to pay lower taxes if they withdraw their entire pension as a lump sum, which may be of interest to expats in France.
This is detailed in French tax code article 163 bis and is dependent on two factors:
Contributions to the pension fund must have been made with taxable income or with exempt income (which would include most employer and personal pensions, SIPPs, and many other overseas pensions). The payment cannot be split; instead, it must be withdrawn in one lump sum.
If you withdraw your entire pension in this manner, you will receive a 7.5% fixed rate, after a 10% allowance that is not capped. With French tax rates reaching up to 45%, plus possible social charges levied on your pension income (see above), this could result in significant savings, allowing you to reinvest the capital in France.
A critical point to remember for UK retirees is that the entire pension pot must be taken in one payment (see point 2 above). When reaching pension age, UK residents can withdraw up to 25% of their pension tax-free, and many retirees do so before moving to France (after which the tax-free option becomes irrelevant as you would no longer be a UK tax resident). However, doing so would eliminate the fixed-rate tax option.
How to pay tax
If you have a UK state or workplace pension, you can continue to receive it when you move to France.
Pensions from the government and from the workplace.
You will need to contact the International Pension Center to claim your UK non-government state pensions and workplace pensions, which you can do here, as well as fill out an International Claim Form. You must also complete a France Individual DT Form, which allows you to apply for UK Income Tax exemption under the UK/France Double Taxation Convention. This form must be submitted to your local Service des Impôts Particuliers in France before being returned to HMRC in the United Kingdom.
If you receive a government service or military pension (a full list of pensions is available here), you must also contact the International Pension Center as described above. However, no tax exemption is available; instead, your pension will always be taxed at source in the UK. This means that UK taxes will be deducted from your pension payments before you receive them.
You must still declare your gross pension income on your annual French tax return, and you will receive a tax credit to offset any tax previously paid in the United Kingdom against any tax liabilities in France.
The French tax and pension rules are complex but there are many ways that you can reduce your taxable income. You should seek up-to-date advice from an international financial or a certified public accountant who is familiar with both the local law as well as those found in France. SJB Global is a reputable firm that can help you navigate French tax laws so that you can make the most of your retirement. It is important to note we are not tax experts and would always recommend you seek tax advice. Give us a call today to learn more about how we can help you!
This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
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