The “flat tax”, one of the major tax reforms of Macron’s five-year term, is 4 years old. So what ? And so for life insurance holders, this anniversary is anything but trivial. Here’s why.
While inheritance taxation has become entrenched in the 2022 presidential campaign, many French people are rediscovering that life insurance is a powerful tool for circumventing inheritance tax. But life insurance is a double “tax envelope”: for inheritance tax, on the one hand, but also for income tax, on the other.
Saving on your life insurance to come back to it a few years later allows you to limit tax on interest or capital gains (in short, financial gains). Like the stock savings plan, for example, life insurance guarantees you “soft” taxation on capital income.
Life insurance: what income to declare for taxes?
Be careful, the money earned thanks to the return on your life insurance is systematically subject to social security contributions, at 17.20%. But for income tax, it all depends on the date of opening and payment. Good news, however, for all savers: for the past few months, income tax has been either nil (0%) or a limited percentage, at 7.5%, 12.8% or 15%.
If your life insurance is more than 8 years old
Simple, basic: whatever the schedule of your payments on this contract which has reached its “tax maturity” (more than 8 years after the date of opening of the life insurance), you benefit from the annual allowance on earnings from your life insurance. That is €4,600 for a single person and €9,200 for a couple. And beware: this is indeed a reduction valid each year on the share of earnings in your withdrawal, not on the amount withdrawn!
For example, a single person can withdraw 12,000 euros in 2022 without paying income tax if a third of his contract comes from capital gains: the tax authorities make the pro rata and count in this case 4,000 euros (one third of 12,000 euros), below the reduction threshold, so zero tax.
Life insurance: why you (often) have to stagger your withdrawals over several years
And if you make a big withdrawalwith earnings exceeding the allowance, the taxation may in any case be limited: most often at 7.50% and more rarely at 12.80%, unless you choose the option of progressive scale taxation (such as wages, retirement pensions, etc.) if you are ever taxed little or not at all. In short, a very advantageous tax in all cases.
If your life insurance is less than 8 years old
Life insurance is blocked for 8 years? No, cliche! But the cap of 8 years obviously has a strong tax impact, since this cap is synonymous with reduction. Before 8 years, any withdrawal is subject to income tax. But at what rate? Here is the good news of the last few months, which has gone unnoticed: no more withdrawals are taxed at 35%!
The 35% flat-rate levy (PFL) is a legacy of the old taxation of life insurance, that before the changeover to the flat tax, single flat-rate levy (PFU) with 17.2% social contributions and 12.8% income tax for all capital income (except tax-exempt investments), in 2018.
Retirement : save money by paying less tax. 11 contracts compared
But the 35% PFL, which concerned contracts of less than 4 years, continued to exist following the entry into force of the flat tax. Why ? Because contracts opened before September 27, 2017 and income from payments made before this date remained taxed according to the old tax system. To simplify, if you opened life insurance over the period 2014-2017, a withdrawal was still recently “charged” at 35% income tax!
Since the end of September 2021, no more contracts have been affected by this 35% PFL! Quite simply because the contracts still affected by the old tax regime have all passed the 4-year mark. Gold, with this old scheme, the PFL drops to 15% once the life insurance is over 4 years old.
Results : if you have income from life insurance less than 8 years old, either the PFL applies – for earnings from payments before the end of September 2017 – or the flat tax at 12.80%. Unless you are tax-exempt, these rates are almost always better than the progressive income tax schedule. So two or three times less than in the era of the 35% flat rate!
More than €60 saved for a withdrawal of €1,000
Example. You have €10,000 on life insurance, which very quickly rose to €15,000 thanks to good managed management, so a third of the gains on this young contract. You withdraw €1,000. The insurer will count 333 € of earnings (one third). Match of three scenariosusing , for income tax:
- Removing old version, with the PFL at 35%: €116.67
- Withdrawal with the PFL at 15%: 50 €
- Withdrawal with the 12.8% flat tax: €42.67
Either way, you pay 17.2% of social contributionsthat is €57.33 (a part has probably already been deducted, over time from the annual interest). Thus, with the flat tax, overall taxation reaches €100 (42.67 + 57.33).
Life insurance gains: the tax reminder
- Your life insurance has more than 8 years ? Abatement. So 0% except in case of big withdrawal.
- Your life insurance has under 8 years old ? You pay income tax (unless you are tax-exempt and claim tax at scale). At what rate? Either at 12.8% (the flat tax) for earnings from a recent contract or from payments made since October 2017. Either at 15% if the income comes from an open contract and payments made over the period 2014-2017.
- In all cases : your earnings are subject to social security contributions (17.2%), levied each year for interest on the fund in euros, or at the time of withdrawal for capital gains on units of account.
Life insurance: the taxation of withdrawals in detail