UK Pensions: from Taux Effectif to Credit d’Impot

The latest Franco-British double taxation convention came into effect on January 1st 2010 and one of its more obscure aspects has only filtered through and had an impact on British expatriates this year, based on declared income from 2011. Let me try to explain what’s happened, obscurum per obscurius.

Taux Effectif

Before 2010 the French would add a UK-sourced pension already taxed at source in the UK to other French taxable incomes (such as the UK State pension) and come up with an overall sum. They would use this to determine a marginal rate of tax, which would then be applied solely to the French taxable income, in this case the UK State pension. If – as often happens – this UK State pension was relatively small compared to the teacher’s pension (essentially any civil service pension), then the resulting French tax would be minimal or nil. This is the method the French tax office refers to as the taux effectif.

Credit d’Impot

TaxThe new system works as follows: the French tax office adds all income together (say UK State pension, civil service pension, private pensions) and taxes the lot at whatever rate is applicable. They then apply a tax credit (credit d’impot) at the French rate of tax on the portion that is foreign-sourced and already taxed in the UK. They’re effectively saying “You’re in France, so we have the right to tax your income first, but because we’re nice, courteous people – and because of double taxation conventions – we’ll give you some money back equivalent to what you would have paid had this income been French-sourced.” A bit like the classic line from the Red Riding trilogy by David Peace when a Yorkshire police inspector says, “We’re from the North and we do what we want to do.”

The trouble is that the relief or credit given by the French tax office is invariably at a lesser rate than the UK tax rate (usually 20 or 25%), because French income tax rates are generally lower.

If we take the case of our retired teacher from Mouans Sartoux, in 2009 she had a teacher’s pension of €18,153 and a UK State pension of €8062, a total of €26,215, giving a French marginal rate of tax of 7.50%, which when applied solely to the State pension of €8062 gives a theoretical French tax bill of €605, or zero in this particular case as €8062 is below the threshold of tax.

Under the credit d’impot system, the calculation of the tax is based on the total of €26,215, giving a tax bill of €2331 (ie a tax rate of nearly 9%), to which the credit is applied in the proportion €18,153 (the civil service pension) divided by €26,215 (the total), giving a tax credit of €1614. So, €2331 minus €1614 = €717 tax due, or €717 more than under the taux effectif method.

Hence the anguished cry, “But I’ve already paid tax!

Well, I did say obscurum per obscurius.


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