Guide to French taxes
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If you make a permanent move to France you will need to make sure you understand the tax system. Kate McNally provides a simple overview of French taxes
Although the reigning party in France’s government changes with almost every election, the framework of French taxation, which is essentially a socialist ideal based on the redistribution of wealth, has remained unchanged for many years.
There is always lively debate about changing the system, notably in the past few years with high business taxes in particular held up as stifling business creation (and hence job creation) and therefore slowing the chances of France’s economic recovery. But this is a country where the fonctionnaire (civil servant) reigns supreme, including a certain preference for the safety of the status quo, so change is probably not just around the corner. It will be slow and no doubt tortuous, but the younger generation of French qualified workers currently flocking to London attracted by a more flexible workplace and lower taxation are likely to spearhead a cultural evolution in the coming years ahead.
For the moment though, France has among the highest taxes in the world to finance one of the most generous social security systems in the world, as you would expect from a republic founded on socialist beliefs.
How does it work?
The three main streams of taxation in France, as in the UK, are from income tax (impôt sur le revenu), social security contributions equivalent to national insurance payments (charges sociales) and tax on goods and services (taxe sur la valeur ajoutée, which is known as TVA).
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As in the UK, France has different tax bands according to the level of earnings, with higher earners paying a greater percentage. But rather than taxing individual earnings, France taxes household earnings in a rather complicated formula designed to favour families.
Basically, household earnings – in most cases the parents’ incomes – are combined and divided by the number of parts, i.e. family members, making up the household, in which working adults count as one share, the first two children as a half share, and any further children also as one share. The resulting figure is used to assess the income tax payable in line with the relevant tax band, and this is then multiplied by the number of parts to arrive at the tax liability for the household.
Not a simple equation, but then French administration isn’t known for its simplicity. It does, however, mean that in general married couples and families pay lower rates of tax than their single colleagues.
If parents are neither married nor living in a civil partnership (known as a PACS in France), they are taxed separately, with only one nominated parent able to claim responsibility for the ‘household’ and thus benefit from a reduced taxation level. While this could account for the greater take-up of civil partnership rights in France, some couples also decide not to marry or enter into a PACS, because they pay less tax when calculated on a separate basis.
Income tax is levied on total worldwide income from earnings, investments, property rental and pensions of anyone resident in France. the UK has a double tax treaty with France, which has been in place since 2010, to avoid dual taxation.
The other major difference in France is that income is not taxed at source on a pay-as-you-earn basis, but via an annual tax return (similar to the self-assessment annual tax return in the UK). If you don’t receive one automatically, they can be obtained from your local tax office or online from www.impots.gouv.fr, and should not be left to fester in your pending file for too long – late returns are susceptible to a fine of a 10% increase of the amount due. Online returns benefit from a slightly later deadline.
There are various tax reductions and tax credits available in all sorts of shapes and sizes: for childcare, for environmental home improvement, etc. But, as in the UK, it is mostly down to the individual to find out about and apply for them. the Caisse d’Allocations Familiales (referred to as ‘La Caf’) is a good first port of call to check this out.
Social security charges
Known in French as either the charges sociales or cotisations sociales, these are the bugbear of employers and the self-employed, who in general pay the higher percentage, and they represent a relatively high social tax also on individual earnings. They are collected by the state, and they are used to fund France’s welfare system under an administration-heavy redistribution system.
According to estimates from the organisation for Economic Cooperation and Development (OECD), employers in France pay social taxes equating to around 30% of each employee’s wage, and quite often even higher percentages. This explains why many employers think carefully before taking on additional staff; hence the on-going debate about the need to rethink the current system. For employees, percentages vary for regular employees and those in management, but for most workers represent about 18% of gross earnings. As for the self-employed, once any initial start-up tax breaks are finished, most entrepreneurs or artisans as they are known in France, end up paying around 40% of their earnings in charges sociales.
As with National Insurance in the UK, the money is deducted from the monthly wage at source (and collected monthly from employers). However, rather than one global payment for social welfare, the social charges in France are separate taxes, collected and managed by separate funds. The following is a guide to the main payments for employers and employees:
This tax is similar to the UK council tax. Every household in France, whether principal or second home, whether occupied by home owners, tenants or non-paying guests, is required to pay the annual taxe d’habitation. It can be paid either in instalments if requested, or in advance during the year by monthly direct debit.
The amount is calculated based on an estimated average rental cost of houses in the local area, multiplied by a percentage set by the local commune. (these percentages cannot go above a certain level.) For families, there is a 10% reduction for the first two children (and/or any ascendants, i.e. elderly parents) and a further 15% for any subsequent children or relatives in the household’s care. Inevitably, this tax is considerably higher in urban communities than in rural areas.
Appearing on the same tax bill is the taxe audiovisuelle. anyone subject to taxe d’habitation must pay this additional charge if there is audiovisual equipment, such as a television, in the house. The annual fee is currently €133. anyone who does not have a television should inform the tax authorities on their annual income tax return.
This tax is basically equivalent to the former property rates system in the UK and is levied on property owners in France, even if they rent out the property. The fee is based on a figure representing half the estimated annual rental value of the house, multiplied by a percentage agreed by the local commune.
The taxe foncière arrives in the post in the last quarter of the year, just as most people are trying to put money aside for Christmas and needless to say it’s not a popular tax. Again, you can pay in instalments (as long as each is paid within set time schedules) or by monthly direct debits in advance (any overpayments or underpayment are settled when the annual bill is calculated).
Apart from some different percentage levels, notably for wine and diesel, TVA in France is simply VAT with the letters switched around, and operates in exactly the same way. There are, of course, a whole host of other taxes – on inheritance, investments, wealth, capital gains, for example – but it would be best to cross those bridges with your tax advisor when and if you come to them!
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