Flat tax or progressive tax: how do you make the right choice for your tax?

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By Birdee

Flat tax or progressive tax: how do you make the right choice for your tax?

When it comes to managing your personal finances, the question of tax arises. But which is better: a flat rate of tax or a progressive tax? This choice can have a significant impact on your personal finances and tax planning.

Flat tax offers attractive simplicity for greater predictability and reduced administrative complexity. But is it really fair for all taxpayers? On the other hand, the progressive scale aims for a more balanced distribution of the tax burden. It encourages a more nuanced approach that takes account of people's ability to pay. But is this complexity justified?

Do you want to manage your tax efficiently? Birdee gives you all its advice and sheds light on the advantages and disadvantages of each system so you can make the best choice. 💡


What is the difference between flat tax and progressive tax?

Flat tax: "Prélévement Forfaitaire Unique" (PFU)

The "flat tax", or “Prélèvement Forfaitaire Unique” (PFU), is a tax reform introduced in 2018 to simplify the taxation of income from capital and savings, with the exception of property. The tax is characterised by a single rate of 30%, made up of 12.8% for income tax and 17.2% for social security contributions. The main advantage of flat tax is its simplicity. Unlike the progressive income tax system, where rates vary according to income bracket, flat tax applies a flat rate to everyone, regardless of their income level or tax bracket.

This tax mainly concerns moveable income such as dividends and interest. However, regulated savings products such as Livret A, LEP, or PEL savings accounts less than 12 years old taken out before 2018, are not affected by this tax.

By opting for flat tax, taxpayers benefit from simpler and sometimes less burdensome taxation, especially those in the upper brackets of the progressive income tax scale. However, you should be aware that the option to opt for the progressive tax scale is still available and can be chosen when you file your annual tax return if it proves to be more advantageous for you.

Find out more about the tax return


The progressive tax

The progressive tax is a system of taxation in which the tax rate increases as the taxpayer's taxable income increases. This system is based on the principle of tax progressivity, according to which people with higher incomes must contribute proportionately more to the state budget than those with lower incomes.

Under this system, taxable income is divided into several brackets, each associated with a specific tax rate. The higher the taxable income, the higher the brackets with higher tax rates. This means that part of the income will be taxed at a lower rate, while higher incomes will be subject to progressively higher rates.

For example, if a person earns an amount that places them in the top bracket of the scale, only the part of their income that exceeds the threshold of this bracket is taxed at the highest rate. The rest of their income is taxed at the rates corresponding to the lower brackets.

The progressive tax also offers specific allowances and deductions, enabling taxable income to be reduced. These measures are designed to adapt tax to each person's ability to pay, taking into account individual circumstances such as family responsibilities or specific expenses. In comparison, the 'flat tax' applied to capital income offers a single rate, regardless of the level of income.

In short, the progressive tax scale is a mechanism that allows fairer taxation, adapted to the different financial situations of taxpayers, by ensuring that those with greater financial capacity contribute more to the State budget.

How the withholding tax rate and regularisation work?


Flat tax or Progressive tax: which is better?

Making the right choice between flat tax and the progressive tax depends on your situation.

Situation Preferred choice
Why choose this option?
Fixed capital income without allowance Flat tax Flat tax is generally more advantageous because it imposes a flat rate of 30%, which is often lower than the marginal rate.
Dividends with marginal rate ≥ 30% Flat tax With a high marginal tax rate, flat tax at 30% reduces the amount of tax compared with the progressive tax.
Capital gains with low allowance Flat tax Where the holding period allowance is low, flat tax generally offers lower taxation.
Non-taxable taxpayers Progressive tax Non-taxable taxpayers benefit from lower rates under the progressive tax, paying only social security contributions.
Dividends with marginal rate ≤ 14 Progressive tax For low marginal rates, the progressive tax, even with the allowance, is often more advantageous.
Capital gains with high allowance Progressive tax For capital gains benefiting from a large allowance (e.g. long-held SME shares), the progressive tax is more favorable.
Specific overall tax situation Variable The choice depends on the overall tax situation, including all income and allowances. Each case should be analysed individually.


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