Withdrawal at source: instructions for use

As strategic as it is sensitive for the government, withholding tax, which will come into effect in 2019, will revolutionize taxpayers’ tax practices and administrative practices.

The withholding tax, applied in almost all Western countries, consists in collecting the tax directly on the income and not more than one year after their payment, as it is the case currently in France. This method of collection makes it possible to automatically adjust the level of taxation to variations in income, and to avoid the difficulties encountered in case of a change of situation (dismissal, retirement, etc.).

Which income are concerned?

Almost all incomes are concerned: salaries and wages, pensions, self-employed income, recurrent land revenue and so-called “replacement” income, such as unemployment benefits.

Only income from movable capital and real estate gains are not included in the scope of the reform: the latter, which represent 2% of taxpayers’ income, are already deducted at source.

What’s the calendar ?

The reform, postponed by the government for a year, will come into effect on January 1, 2019, but taxpayers will be able to see the rate at which they will be charged from April to May, via their 2017 tax return.

Modifications may then be requested from the administration. The rate will be confirmed in the tax notices sent in the summer and sent to the collectors in October 2018.

How will the tax be collected?

For employees, the tax will be levied directly by the employer: it will appear on the pay slip in the same way as the social contributions. Among pensioners, the collection will be carried out by the pension funds.

The self-employed will pay a monthly or quarterly installment, calculated by the administration according to their income from previous months, and then adjusted according to their actual income.

What will the tax rate be?

The rate will be calculated by the tax administration – who will be responsible for forwarding it to the collectors – on the basis of the previous year’s income. It will be updated every year in September.

The taxpayer may request an update of his tax rate during the year, to take into account changes in family situation or significant variations in income.

What will be the confidentiality?

In theory, employers will not receive confidential information about their employees. But the rates provided by the tax authorities can give them information on the state of their resources (property income, spouses’ salaries …)

To avoid this, taxpayers may request that a “neutral rate” be applied to them. If this rate is lower than the actual rate, the balance must then be paid directly to the tax authorities.

Who will pay ?

Tax will continue to be calculated at the tax household level – the so-called “conjugalization of taxes”. This means that both members of a couple will be charged at the same rate.

In case of income disparities, it will be possible to opt for individualized rates. The highest paid spouse will then be charged at a higher rate and the other at a lower rate.

What about tax credits?

The transfer to the levy will not prevent further reductions or tax credits, such as energy renovation of his home or the employment of a person at home.

As today, these credits will continue to be collected in September. However, the government has decided that a 30% deposit will be paid each year for home care or childcare.

Is 2018 really a white year?

Taxpayers will pay their 2018 taxes on 2017 revenues, and 2019 taxes on 2019 taxes. This means that current revenues for 2018 will not be taxed, the so-called “white year”.

To avoid abuses, Bercy has planned several devices, especially for the self-employed, who have a margin of maneuver on the date of collection of their income. If they are in 2018 higher than those of the last three years, they will be taxed on this surplus.

Will he still have to declare his income?

Withholding does not mean the end of administrative procedures. Taxpayers will have to continue to report each year, in the spring, their revenues to the administration.

This approach will update the tax rate, but also include tax credits and exceptional income, so that the tax can refund the “over-payment” or claim the missing taxes.

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