This summer, new governments took power in both France and the UK; Michel Barnier became the new prime minister of France, and Keir Starmer, the new leader in the UK. Both countries are highly indebted and, therefore, need to either cut spending or raise taxes, neither of which is very palatable to the general population.
Thus, in this context, at the beginning and the end of October, respectively, the new governments of France and the UK announced their budgets for the following year. In this article, we will compare the two budgets; we will consider what it says about the two countries and what it all means for you.
France’s Budget: Cuts and Controversies
Michel Barnier presented his government’s budget in early October. However, it must be noted that it is not a definitive budget. These are the government’s propositions, which are open to discussion and modification should other political parties suggest alternative ideas that the government agrees to. The French government can force through its own propositions (49/3), but would ideally prefer a budget agreed by a grander coalition. At the time of writing (early November), we do not know the outcome, but the chances are it will not vary greatly from the original proposals, so what were these?
Mr Barnier said his government would cut spending, by some 40 billion euros, as well as raise an additional €20 billion of revenues via tax hikes. Most of the new income will come from companies, and more specifically from those with a turnover greater than 1 billion euros. The latter will have to pay an exceptional contribution on profits that should bring in an extra 8 billion euros in 2025.
With regards to individuals, only the wealthiest taxpayers should be concerned, those whose reference income exceeds 250,000 euros for a single person, or 500,000 euros for a couple. These tax households will contribute 2 billion euros per year, for three years.
Antoine Armand, the economy minister, has committed himself to the following statement: “For every euro of additional revenue, we will save two euros of public spending”. However, when you look at the proposals for spending cuts, I say good luck to him! The two principal propositions for saving money both look controversial and ripe for contestation. The first being to cut 4,000 jobs in schools and the second being to freeze pensions for six months. (the latter may not seem so shocking, but remember, we’re in France!)
The UK Budget: A Focus on Tax Rises
Moving over to the UK, the British chancellor’s budget was focused on tax rises of £40 billion. As in France, the tax rises are primarily aimed at companies. Employers will have to pay more National Insurance (NI) on employee salaries, and this is expected to raise some £25 billion.
The Institute for Fiscal Studies (IFS) estimates this will increase the real-terms cost of employing a minimum wage worker by 8%; furthermore, that’s before the 6.7% rise in the national living wage from April 2025. One has to wonder if this will lead to fewer jobs and/or higher prices (aka inflation) as companies pass on these higher costs to consumers.
For individuals in the UK, taxes are rising too. Capital gains tax is to increase from 10% to 18%, with the higher rate rising from 20% to 24%. Still, this remains below France’s flat tax capital gains rate of 30%; although for those with a UK S1 form, this is reduced to a now competitive 20.3%.
Finally, the changes most likely to affect retirees and early retirees in France, are changes made to UK pensions. Up until now, UK pensions have not been liable to inheritance tax, however, as from April 2027 that will change. Indeed, if the deceased is 75 or older when they die, inherited pensions will then suffer a double tax; in addition to inheritance tax at 40%, inheritors of pensions then pay income tax on money they draw down. This could mean a total UK tax charge of up to 52% for basic rate taxpayers or 67% for additional rate taxpayers!
Whereas up until now, I would say a majority of our clients have tended to leave pensions in the UK, with this rule change, I envisage that the majority will now cash in UK pensions, moving the funds into more tax-efficient vehicles in France, but that is an article for another day!
Conclusion: Comparing the Two Approaches
As a conclusion to today’s article, we can see notable similarities between the two budgets. Both countries have put most of the higher tax burdens onto companies and the wealthy. One issue with this is that companies may simply pass on these extra taxes to consumers via price rises.
The overall tax burden in the UK is now said to be 38.2% of GDP, which, whilst rising, is still some way behind that in France, which, according to the European Commission, was 45.6% in 2023.
As we have said before, France’s high tax burden is mainly due to the cost of employment. For those living off capital, France’s tax regime can actually be surprisingly competitive. Indeed, in light of the changes to UK pensions, significantly more so now!