There is no Pay As You Earn scheme in France so, no tax is deducted at source, and it is up to the individual to put aside the money to pay their tax bill, usually in either three instalments (payable on 15th February, 15th May and 15th September in the year after the income was received) or in ten equal instalments payable from January to October in the year after the income was received. Social security contributions – the French equivalent of National Insurance Contributions – are deducted at source, however.
The main reason that tax is not deducted at source is that in the past, the French income tax rates are not finalised until during the tax year in question (or even, in some years, after the tax year has ended). This means that they cannot issue tax codes, like the UK does. In addition, the French tax system is much more complicated than the UK system and a family is taxed as a household, not a collection of individuals.
It has recently been announced that the French would like to introduce a ‘withholding tax’ on employment income, probably at a flat rate. This is unlikely to be easy to put into place, and thus is unlikely to be introduced until 2009. The people affected will have to be identified; it is likely to be more administratively burdensome on the employer and French tax laws will have to be revised. Confidentiality will be an issue, particularly if coding is introduced, like in the UK (the code is designed to hide your personal allowances and deductions from your employer). Furthermore, what income will be subject to the withholding tax, and at what rate tax will be withheld (and will this be the full and final tax payable on such income)?
There has been some consultation on this, but not a lot of information has been released as yet, and we are still awaiting further details. Most interesting of all, however, is the proposal that taxpayers affected by withholding tax may not pay income tax on their 2008 employment income. This is because of the transition to a withholding tax in 2009, when people will be paying tax on their income during the current tax year for the first time (instead of on a previous year basis) and will thus have to be paying two years of tax in one year. Thus, no tax will be payable by these individuals in 2009 in respect of the 2008 tax year. It should be noted that France expects that the tax payable in 2009 will be greater than the loss of revenue from 2008. Finally, this will only affect salaried individuals, not those who are self-employed.