Tax on state pension?

[Polly]

Hotrodder, I hope for the very best result there can be for this problem.

The DWP apparently have a huge task paying money for mistakes as made in your wife’s case - it’s not just the odd one or two.

[exile]

@Hotrodder

The terminology may be complicated but the reality is very straightforward.

Assuming there are just the two of you:
You can have a combined income up to €21544 and you pay no tax.
But I guess this back payment will take you above that.
So for combined income between €21544 and €54956 You will pay 11% tax on that portion. The €21544 remains tax free.
If the combined income goes above €54956 up to €157140 you will pay 30% on that portion of the income as well as the 11% on the portion between €21544 an 54956. The first €21544 remains tax free.
It goes up again after that 157140 but I doubt if we need to consider that.

You should be able to work out how much tax is due based on that but if it is still confusing:

Suppose your joint income comes to €51544. You pay nothing for the first €21544 but do have to pay tax on the remaining €30000. So you will pay 11% on €30000 = €3300. That is a worst case calculation for that joint income. You will have to do the sums on your actual income.

You might be able to make a saving on that. There used to be the opportunity to pay a flat rate tax on lump sum payments - which in essence this back payment is. I assume that is still in existence @elsie may well be able to comment.

In that case, You declare your joint incomes as €21544 - using some of that back payment to top up your regular income for the declaration. You then declare the excess as a lump sum - so in my example above you would pay 7% on €30000 = €2100.

What impact does that have on your future declarations to the tax office? none. In the following years you just declare what your income is and if it stays below the tax threshold, no tax will be due. If you can use the lump sum route to make the declaration it will be clear to the tax office why your income went up and then fell back again. If not they might just ask why the change.


Just one other point. You UK OAP is not taxed in the UK if you have declared your residence as being in France. Other UK pension incomes should also not be taxed but some companies find that too difficult and charge UK tax, which you then have to laboriously claim back from HMRC.

[Hotrodder]

exile Your detailed explanation does shed a lot of light on our confusion. We thank you for taking the time to help.
With my aged brain it took a few readings before it sunk in but I believe I have it now. We should be able to pin it down fairly close by estimating our next year's pension income and will bear in mind the threshold of €21544 may well be changed by the time we have to do the declaration next year. We might be able to sleep better tonight.


Thanks to all who contributed.

[L Austin France]

We might be able to sleep better tonight.

I'm no tax expert but might it be worth talking to the tax dragons as it's not your wife's fault this error was made & underpayments made for 14 years? It may be that the lump sum divided by 14 would not have put you both in a taxable bracket each year so maybe different rules apply in your case.
If you're determined to declare this windfall it's got to be worth asking.

[elsie]

Even going up to an income of 157140€, adding the taxes payable for each band, the overall income tax is about 55K - so overall about 30% tax is the maximum you would be likely to pay.

The bands have usually changed slightly each year with inflation. In the more recent past, the first taxable band was 14% but Macron reduced it to 11%. You can see the historical changes https://fr.wikipedia.org/wiki/Bar%C3%A8 ... _en_France

I would agree it would be better to go and talk to the tax office. My experience is they are very helpful. Yours is an unusual and special case but they should let you know the best option to minimise the taxes due. I understand there are circumstances where it is possible to spread abnormal gains over three years which helps reduce the overall tax.

[Nomoss]

As suggested by others above, probably best to talk to the tax people, or possible your local France Services office, about this payment.
Otherwise, it might be advantageous to have it treated simply as a lump sum payment.
The Fixed Rate option (Para. iv under Section iii below) has no limit, and allows a 10% discount before applying a fixed rate of 7.5%.

Details of taxation of lump sums is below - scroll down to "iii. Lump Sum Pension Payments"

https://www.french-property.com/guides/ ... tax/income

[elsie]

I don't think the Fixed Rate lump sum option is available as there is an ongoing pension payment.

[exile]

I don't think the Fixed Rate lump sum option is available as there is an ongoing pension payment.

You might be right Elsie but for ex-pats at least the taking of a lump sum from a pension pot is the most often use for the lump sum and of course these pensions are ongoing but I think critically not the lump sum.

Certainly the lady at the tax office was happy enough that I declared mine as a lump sum and it was she that said that rather than declaring the whole sum as a lump sum, I could top up the income to the maximum tax free limit and then declare the rest as a lump sum. The only thing that she was worried about was whether this was genuinely a one-off or whether it would happen every year.

The above should assure @Hotrodder that when the time comes next year, he should have no fear about discussing with the tax people at the Hotel des impots. In my experience they are there to genuinely help rather than screw the last centime out of you.

[Hotrodder]

We have no option but to declare the income. If we keep quiet about it and they decide to have a spot check at some time in the future the fines for falsifying on the declaration would finish us, probably beyond the value of our house. We don't begrudge the French government taking their fair whack of tax from our pensions when we exceed the 0% tax threshold. We are thankful they let us live here in a much more amenable situation than we could afford across the Channel. We just needed to know how much of the windfall we will have left when the dust settles. We will be consulting with the local tax office. We usually have to have a RDV every year with an English speaker to help with the online forms. The boxes to enter the figures seem to change slightly every year so we get them to help with the forms.

[DominicBest]

I’m guessing that you have not used your full tax allowance in the past, the years that these pension payments should have been paid. Is there any way you can ask the tax office to apply the unused allowances over the years to apply to this lump sum? I’m probably clutching at straws.