Whatever you love about France, such as its art, culture, stunning natural scenery, renowned cuisine, and a relatively leisurely pace of life, there is no question that it is an attractive place to retire, so it is not surprising that there has continued to be a growing trend of UK nationals deciding to spend their twilight years in France.
If you are one of those, it’s a safe bet that you will enjoy those years more if you have your financial affairs in order.
However, when it comes to the tax situation for British expats’ pensions in France, the reality can be both simple and complex. After all, there will always be complexities in understanding cross-border tax obligations.
This is to offer you a closer look at how different UK pensions are taxed in France and the potential implications for your financial planning.
Understanding French tax residency
In the context of moving from one part of the world to another, confusion can easily arise whenever the term “residency” is mentioned. Most of us tend to instinctively interpret the term as referring to legal residency in a given country or, to put it another way, the rights that we might have, as a national of one state, to live and work in another state.
Tax residency, though, is a different concept. It is about the question of which country has taxing rights when it comes to a given person’s worldwide income, gains, and wealth.
We’ve covered the subject of tax residency in France in greater detail before, but let’s do a quick summary. For you to be considered “tax resident” in France, only one of the following four things will need to be true:
- France is the location of your main residence or home
- France is your principal place of abode
- France is where your principal activity occurs
- France represents the “centre of your economic interests”
As we touched on in other articles on tax residency in France, it is not a matter of “choosing” where to pay your taxes; rather, it is a matter of where you fall within the rules.
Knowing, then, whether you are tax resident in France will be vital – because if you are, you will need to declare your worldwide income to the French tax authorities. This will encompass your income from sources such as rental properties, dividends, and – yes – pensions, regardless of where the income originates.
Types of UK pensions and their taxation
For each of your UK pensions in France, the approach to taxation will depend on the type of pension it is. So, here’s a “cut out and keep” guide to what tax treatment is applied to various pension types.
- The UK state pensionThe double taxation treaty between the UK and France, which we’ll elaborate on in a moment, dictates that if a UK national retires to France, their UK state pension will be subject to French tax laws, rather than UK ones.So, during your time in France, your UK state pension will be taxed solely in France. You will need to declare it on your French tax return, and it will be taxed at French income tax rates after an allowance of 10%, capped at €4,321 per household for 2024.
- Private, workplace, and personal pensionsPersonal pensions such as SIPPs, as well as workplace pensions encompassing defined benefit or defined contribution pensions, will also be taxed in France instead of the UK.Such pensions will be integrated into your household income, and the same aforementioned 10% deduction will apply, capped at €4,321 per household. Otherwise, they will be subject to France’s usual progressive income tax rates.
- UK Government and military pensionsPensions under this category, such as those from public service employment, civil service, or the military, are a notable exception in this list, as they remain taxable solely in the UK. This will be the case for yours, even if you are a “tax resident” in France.It is important to note, though, that you will still need to declare your UK Government pension on your French tax return.While the pension itself will not be taxed, it will be used to calculate your effective tax rate in France, your taux effectif. So, it may raise the tax rate applicable to your other income in France.
The UK-France double taxation treaty
We have already referenced the UK-France double taxation agreement, which is an essential treaty to be aware of, particularly concerning the French tax treatment of UK pension income. The presently applicable version of the agreement was signed between the two countries in 2008 and took effect in 2010.
The purpose of any double taxation treaty is to help individuals avoid being taxed twice by different jurisdictions (so in this case, the UK and France). This includes ensuring pensions are not taxed twice. The agreement, therefore, provides clarification on which jurisdiction applies to each pension type.
The regular practice of UK pension companies is to deduct tax at source. This means that to avoid double taxation, you will need to arrange for the companies to pay your pensions gross.
To get them to do this, though, you will need to prove that you are a French tax resident and paying tax in France. Fortunately, HM Revenue & Customs (HMRC) has a form that enables you to claim tax relief and ensure gross payments – the “France Individual DT” form.
French tax calculation on pension income
As already mentioned, France is known for its progressive income tax scale. See our tax rates page for the latest income tax rates.
It is essential not to overlook that France taxes households, rather than individuals. Tax is calculated on the number of members of the household, or parts familiales. This system has the effect of lowering the overall tax if one spouse has a higher income than the other, or if dependents are living in the same household.
A “unit” system is used to calculate the tax, so a married couple would count as two “units”, for instance, while a married couple with one child would be 2.5 “units”.
French social charges (prélèvements sociaux)
Social charges of 9.1% generally apply to pension income in France. However, holders of an S1 form – which is a certificate of entitlement to healthcare in France – may be exempt from paying these charges.
Lump sum withdrawals: what you need to know
The rules in the UK allow for up to 25% of a pension pot to be taken tax-free. However, this 25% tax-free lump sum does not apply in France. If, then, you’re a French tax resident, this lump sum will be taxable in the country at your marginal income tax rate, and you might be subject to 9.1% social charges as well, unless you’re exempt via an S1 form.
You will ultimately have to choose, then, whether to:
- Take your lump sum withdrawal before you become a tax resident of France
- Take advantage of France’s special fixed-rate tax regime for lump sum withdrawals of an entire pension in one go. This regime is known as “prélèvement forfaitaire”; it means that, subject to fulfilling specific criteria, you could qualify for a fixed tax rate of 7.5% on the lump sum. Otherwise, your withdrawal will be taxed at your marginal income tax rate.
How to minimise tax on your UK pension in France
It is worth emphasising that the situation of every UK national retiring to France will be different from that of the next person. This means you should not treat an article like this one as equivalent to the tailored advice and guidance that only a suitably qualified adviser (like those of Kentingtons) can provide.
So, with that caveat out of the way, here are some of the strategies that you might consider to reduce your tax burden as a Briton enjoying retirement life in France:
- Structuring your household income effectively
- Making the most of the 10% deduction and other allowances
- Reinvesting your pension in an “assurance vie” to tap into tax and inheritance advantages in the long term
- Converting to euro-denominated assets as a means of mitigating currency risk.
When should you seek professional advice on your UK pensions in France?
Again, when it comes to dealing with a UK pension in France, there is no “one-size-fits-all” approach that everyone would be well-advised to take.
The reality is that the most suitable course of action for one person, such as leaving their pension in the UK, or moving their funds out of the UK may not be the right step for someone else.
If you are in any doubt about the right way forward, seeking out tailored advice from bilingual, fully qualified legal advisers can significantly help you to navigate French tax law confidently as a high-net-worth individual.
Take proactive steps now to optimise your financial arrangements in France
By familiarising yourself with the situation set out above for different UK pensions in France, in addition to exploring the financial planning opportunities available to you and taking essential compliance steps, you can help to ensure that – yes – “tax doesn’t have to be taxing” (at least when it comes to your pensions in France).
Our team at Kentingtons would always encourage our readers to assess their situation before retiring or relocating to France carefully.
The right expert cross-border advice can play an integral role in your efforts to minimise your tax obligations and protect your income legally. Contact us today, and we would be pleased to discuss how we could best serve you when you become one of our clients.