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How are UK Pension Lump Sums Taxed in France?

Is the UK 25% PCLS tax free in the US?

How are UK pension lump sums taxed in France? It may be the case that you are looking to take a lump sum from your UK pension instead of a regular withdrawal, and you want to know what the tax implications are of doing this.

This blog will explore how to minimise both the UK and French tax on any lump sum pension withdrawals.

Will I not receive a large UK tax bill if I take the lump sum?

Commonly, UK pension holders will en-cash the 25% tax-free pension commencement lump sum, and then withdraw the remaining 75% over a period of time to minimise UK tax due. Providing you are not in excess of your lifetime allowance, this is a beneficial way to draw down benefits as a UK resident.

As a UK resident, you can enjoy 25% of your pension tax-free, and then take the rest of your pension as income utilising any allowances available. For example, UK residents receive a personal allowance of £12,570 each tax year where they pay no tax. They can also earn a further £37,700 whilst only paying 20% tax.

However, if you are a French resident, there can be a more beneficial way to draw-down your benefits through applying for a nil tax (NT) code. It is also important to note the 25% tax-free lump sum in the UK is not tax-free in France.

What does an NT code do?

By applying for an NT code, you can have your UK pension income paid out gross (free of UK taxes). This is because the HMRC recognise you are a French resident, and due to the double taxation treaty in place, the income is not subject to any UK tax.

Therefore, you can take as much of your UK private pension or personal pension as you would like and have it all paid out gross (if you do not exceed your lifetime allowance).

The income will however need to be declared in France.

If it’s not taxable in the UK, will I not get a large French tax bill?

If you are not taxed in the UK, you may question how are UK pension lump sums taxed in France? Considering the unfavourable tax rates in France, you could be forgiven for thinking it would be non preferential. The marginal income tax rates in France are set out below:

  • Up to €10,225: 0%
  • €10,225 – €26,070: 11%
  • €26,070 – €74,545: 30%
  • €74,545 – €160,336: 41%
  • Above €160,336: 45%

Furthermore, social charges are included at between 3.8% -9.1% on pension income exceeding €11,408.

Contrary to how the French system usually taxes income, individuals taking a pension lump sum can elect for a fixed rate of tax at 7.5%. This is known as a ‘Prelevement Forfaitaire‘ and is only available to individuals taking the full pension lump sum. Considering you can have the payment paid out gross of UK taxation, it can be very beneficial. You do also have to pay social charges at 9.1%.

Example –

I have set out below a comparison of an individual taking a €250,000 lump sum payment (not including social charges).

Marginal rate:

10,225 @ 0% = €0
15,845 @ 11% = €1,742.95
48,475 @ 30% = €14,542.50
85,791 @ 41% = €35,174.31
89,664 @ 45% = €40,348.80

Total tax payable = €91,808.56

Prelevement Forfaitaire:

€250,000 @ 7.5% = €18,750.00

From the illustration above, you can see how tax efficient the Prelevement Forfaitaire can be when lump sum payments are substantial.

What if my UK pension provider won’t pay out to a non-UK resident?

Here at Harrison Brook, we come across queries such as these frequently. Some UK pension providers do not pay out benefits to non-UK residents which can create issues when trying to access your pension. The policy may also be invested in a one size fits all solution, not aligned with your requirements.

If you are in this situation, it may be beneficial to transfer your pension scheme to an International SIPP or a QROPS. This allows for flexible access and an ongoing investment strategy implemented by ourselves.

Please feel free to get in touch with us if you have any questions regarding your UK pension, and are wanting further information on what might be the best solution.

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