There have been some changes to French taxes for 2008 and so I thought this was a good time to remind you of the tax rates for 2007 income as well as update you on the key changes made for 2008.

French taxes are due in 2008 on income earned in 2007. If you are a UK resident and a non-resident of France, you may have French income such as rental income, that will attract French income tax. If you are already a French resident or planning to move to France in the near future and take up residency there, you will be liable to French taxation on your worldwide income.

Income tax is levied in France on rental income, pensions, some investment income and earnings at scale rates as below.

If your tax liability is less than €308 (£229), you are effectively exempt from French income tax because of general deductions called the décote and the franchise which relieve small liabilities. Depending on other more specific exemptions and allowances the figure can be even higher in practice.

The minimum tax rate for non-residents on French source income earned in 2007 is 20 per cent, and a withholding tax of 20 per cent is applied at source to French salary received by a non-resident of France.

Social charges, which are another form of French tax on income and gains, payable only by French residents, are also levied. The rates are 8 per cent on earnings, 11 per cent on investment income and gains, and 7.1 per cent on pensions. Part of these charges can be deductible in calculating the tax due on income charged at scale rates but not if taxed at a fixed rate.

For French residents who hold either Form E121 or E106 in their own name, income from any type of UK pension is exempt from French social charges. This exemption from social charges only applies to the holder of the form, and not the household.

Bank interest

French bond or bank interest and capital gains are taxed at source at a fixed rate of 16 per cent. From 1 January 2008, the withholding tax rate on bank interest, and the capital gains tax rate for sale of shares, is increased to 18 per cent.

Residents of France will also have to pay an additional 11 per cent in social charges.

French residents who receive interest from a UK bank account (or from any other EU country) can also elect to have the interest taxed at 18 per cent for 2008. In order for this to happen you must make the election by completing Form 2778-SD each time interest is paid. Otherwise, where no election is made, the usual scale rates will apply.

Dividends

From 1 January 2008, tax on dividends can be aligned with that of bank interest and all other investments that are taxed at a fixed rate.

Taxpayers have the option of either electing for dividends to be subject to a final and fixed withholding tax rate of 18 per cent applied to the gross dividend with no deductions or abatements, or for the usual scale rates to apply with the relevant deductions and abatements.

If the election for the withholding tax is made, there will be no allowances, exemptions, credits or deductions. As a result, for most taxpayers whose marginal rate of tax is 30 per cent or less, the election for fixed rate taxation will not be beneficial. For taxpayers whose marginal rate of tax is 40 per cent, the election for fixed rate taxation will only be beneficial if dividends of more than €30,000 (£22,398) are received. Social charges of 11 per cent are also payable on dividends.

Under the Double Tax Treaty (UK/France) a French resident recipient of a UK company dividend is granted the same tax credit as a UK recipient would be (currently 10 per cent in January 2008), but this credit is never repayable nor can any unrelieved tax credit be offset against other income. The tax credit is offset against the French tax liability on that same dividend.

Tax credit for mortgage interest

A tax credit is available from 1 January 2008, for French tax residents on interest paid on a mortgage to purchase or build your main residence in France for the first five years of ownership (people who do not have a tax liability will receive a refund from the French tax authorities).

The credit is 20 per cent of the borrowings, and is limited to €750 (£559) per year for a single person (or widow/widower or divorcee) and €1,500 (£1,119) for married couples or PACS partners. The credit is increased by €100 (£74) per dependant and by €50 (£37) where a child lives alternately with both parents.

In the first 12 months, the tax credit and income ceilings are double, ie the credit is up to 40 per cent of the borrowings, limited to €1,500 (£1,119) for a single person and €3,000 (£2,239) for a couple.

For disabled people, the credit is 20 per cent of the interest paid, capped at €1,500 (£1,119) for a single disabled person (or widowed or divorced), or €3,000 (£2,239) for a married couple or PACS partners where one of the couple is disabled.

The tax credit is available where the acte authentique was signed after 6 May 2007. It is also available for properties being built provided there is a declaration of commencement of building works (declaration d’ouverture du chantier).

The credit applies for the first five years following the acquisition of the main residence. This provision will be open to everyone who acquires a main residence, not just first time buyers.

Where a taxpayer is required to move home due to work, the credit is still available provided the property is not rented out and the taxpayer does not acquire another residence.

There are various other tax credits available. They are not deductible against the gross or net income, but deductible against the actual tax payable.

Certain tax credits are given on a cumulative basis, limited to €8,000 (£5,972) per household. This limit will be increased by €750 (£559) per dependant, and €5,000 (£3,733) for each disabled dependant.

There is an allowance for the over 65s whether or not they are retired. For income earned in 2007 of up to €13,370 (£9,982) an allowance of €2,172 (£1,621) can be deducted from the individual’s net taxable income. For 2007, on income from €13,370 (£9,982) to €21,570 (£16,104) the allowance is €1,086 (£810).

French income tax can seem very complicated to the British and it is always advisable to employ the services of a tax specialist well versed in both the UK and French tax systems to make sure you get it right. Expert advice can also help you to legitimately save tax thereby allowing you more money to enjoy living in France.