As of 1st January 2019, taxes in France will be paid at source for certain types of income. Although PAYE systems exist in many countries, including the UK, this will be a first for France. Whilst the French authorities are doing everything they can to ensure this reform goes smoothly, it is still a huge change for French tax payers.
Social charges on salaries, pensions and unemployment benefits are already paid at source. Income tax, however, has always been declared on the tax form by the end of May of each year and paid either monthly or quarterly the following year. The problem with this situation is that where there is a significant change in the taxpayer’s life, for example a wedding, divorce/separation, loss of a partner or birth of a child, which would affect the tax payable, these changes were not taken into account until much later.
Those who do not pay tax because their income is too low or, for example, those with UK source income that is not taxed in France (Civil Service pensions, UK rental income, UK salaries) will not be affected and will continue not to pay tax.
From 1st January 2019, the income that will be subject to the pay at source system includes, French salaries, French pensions, French job seekers allowance, benefits, and sickness/maternity pay. The employer or authority responsible for the payments will also deduct the income tax and pay it directly to the tax authorities. Auto-entrepreneurs, micro-entrepreneurs, business owners and the self-employed will pay a monthly amount to the tax authorities. Income tax and social charges on French rental income will be paid monthly or quarterly, directly from the taxpayer’s bank account.
The rate of tax which will be applied was calculated by the tax authorities based on the income declared in 2017. This rate, which is either an individual rate, a joint rate or the neutral rate, appeared on tax statements in 2018. In homes where one partner’s salary is significantly more than the other, they have the option of having individual rates based on their own income. This rate will be communicated by the French tax authorities to employers, pension bodies and the French job centre.
The tax which would have been paid in September 2019 on the income received in 2018 will be cancelled out by a one-off tax credit. This however will not affect dividends, capital gains or withdrawals from assurance vies made in 2018 as they are considered “one-off” benefits.
The self-employed, whose income may change from one year to another, will be able to adjust their monthly amounts on the impots.gouv.fr website in a way which will be simpler than the current payment situation.
What will not change is the rates of tax, the tax credits and tax reductions, and the obligation to declare all worldwide income every year before the end of May. If your income has changed then a new rate will appear on the tax statement in September 2019 and it will apply to your monthly payments from that September.
The new system will not really affect those receiving income from capital. The flat tax introduced in January 2018 will continue to apply in 2019 to interest, dividends, assurance vie withdrawals and capital gains. The tax will be taken at source when the interest is paid into the bank account, or at the time of withdrawal on the gain element of an assurance vie investment. For withdrawals from assurance vie policies which were created or topped up before 27th September 2017, the policy holder may opt to be taxed at the old system (35% tax in the first 4 years, 15% tax after 4 years and 7.5% after 8 years with the abatements of €4,600 per person or €9,200 per couple) or their marginal rate. Withdrawals from assurance vie policies created or topped up after 27th September 2017 (if the amount exceeds €150,000 of capital) will be taxed automatically with the flat tax unless and until the tax payer opts for their marginal rate. However, unless you don’t normally pay tax, in most cases the flat tax is more tax efficient as it essentially reduces the income tax to 12.8%. Social charges at the new rate of 17.2% will continue to apply to all capital income.
For any questions on the above or how you may be affected please do not hesitate to contact your local Spectrum adviser.