How Should a Government Service Pension Be Taxed?

Tuesday 01 November 2011

We show an example of just how the new crédit d'impôt should be calculated, provided by a French tax official.

We had some interesting responses from you to our article last week on the confusion that seems to be happening across the country with respect to the taxation of UK government service pension schemes.

As we reported, local tax offices are adopting different approaches to the interpretation of the rules.

From what you are telling us the effects seem to be minimal; indeed, some tax offices seem not to have changed the way they assess the income, by continuing to use the ‘taux effectif’ method, rather than the adoption of a crédit d'impôt. Whether they later decide to review these assessments can only be a matter of conjecture.

The problem for anyone trying to understand the rules is that the precise method of calculating the crédit d'impôt is not set out in the tax treaty, nor does it yet seem to be available in any regulations.

So with the help of one reader, we asked a local tax office who did seem to be on the ball, just what should be happening.

The example is for a couple under 65 with a gross government service pension of €20,000, as well as €5000 other pension income, giving a gross annual income of €25,000.

Stage 1

First, we calculate the liability of the total income of the couple to French income tax.

Gross UK Govt Pension	= €20,000
Gross Other Pension	= €5,000
Total Income	= €25,000

Those of pensionable age are granted a 10% allowance (abattement) against all their pension income (up to a maximum of €3660 allowance), and so with this allowance we arrive at:

Less 10% allowance	= €2,500
Therefore, taxable revenue (R)	= €22,500

Under the French system of taxation, household income is divided into ‘parts’, which in the case of a couple is two parts. So the equation is as follows:

N	= 2 (‘nombre de parts’ for a couple)
R/N	= €11,250

Using French taxation tables* we then arrive at the following calculation for tax bill:

(R x 0.055 less 327.97 x N)	= (€22,500 x 0.055 less €327.97 x 2)
= €1238 less €656	= €582
Tax Rate = €582/€22,500 x 100	= 2.59%

Stage 2

Next, we then assess the tax credit for the government pension against this tax liability:

Gross UK Govt Pension	= €20,000
Less 10% allowance	= €2,000
Total	= €18,000

Applying the above tax rate of 2.59% to this total:

€18,000 x 2.59% gives €466 ‘crédit d'impôt’

Stage 3

Finally, we then deduct the tax credit from the preliminary calculation:

Therefore final French tax bill = €582 - €466 = €116

*The French tax table (le barème) is published in the rice paper notes that come with your tax declaration, which notes are called ‘Déclaration des Revenus 2010 – Fiche de Calculs Facultatifs’.