Understanding Hong Kong Salary Tax

Hong Kong’s taxation system is globally recognized for its simplicity, low tax rates, and territorial basis. In this guide, we’ll cover everything you need to know about Hong Kong Salary Tax including tax rates, allowable deductions, exemptions, and how to file your return.

Overview of Territorial Taxation System

In Hong Kong, salaries tax is based on the territorial source principle. This means that only income arising in or derived from Hong Kong is subject to taxation, regardless of where the individual resides. Income derived from employment, office, or pension in Hong Kong is accessible, even if tax has already been paid elsewhere.

Key Characteristics of Hong Kong Salary Tax System

• Hong Kong Income Tax is based on a progressive rate scale, that ranges from 2% to 17% at which an individual is taxed depending on his net chargeable income. 
• In Hong Kong, a peculiarity about its taxation system is that it doesn’t impose a capital gains tax, a dividend tax, or an inheritance tax.
• Generous allowances and deductions to reduce taxable income 
• Joint assessment options for married couples.

Personal Assessment for Tax

Personal Assessment is a calculation of tax, which helps to minimize tax liability for some taxpayers in the personal income tax field. Under the Inland Revenue Ordinance (IRO) in Hong Kong, there are three types of taxes: Staff salaries tax, profits tax and property tax. In case an individual taxpayer comes under multiple tax categories, they may elect for personal assessment to combine their incomes into a single assessment. However, if the taxpayer is only liable to Salaries Tax, personal assessment may not result in any tax savings.

Hong Kong Salary Tax Rates and Calculation 

Hong Kong salary tax is applied at the following progressive rates to an individual’s income, less permitted deductions, charity contributions, and personal allowances: (Assessment Year: 2018–19 and onward )

The following formula is used to calculate net chargeable income, or income subject to taxation:

However, the maximum amount of tax that can be paid is restricted to 15% standard tax on the individual’s income from employment less any permissible deductions and charitable contributions, without deducting any amount for personal allowances.

How To calculate net chargeable income 

Net Chargeable Income = Income – Deductions – Allowances

Note that the minimum allowable amount applicable to all Hong Kong taxpayers is 132,000 HKD (as of 2018/19 and onward).

Salary Tax Example

This is the salary tax example of a single male, $500,000 Annual Salary, No Deductions

Let’s break down the tax calculation based on the provided information:

1. Total Income: You earned a total income of HK$500,000.
2. Deductions: You have no deductions, so this amount is HK$0.
3. Allowances: You are entitled to certain allowances:
   • Basic Allowance: HK$132,000
   • You do not qualify for any other allowances (Single Parent, Personal Disability, Child(ren), Dependent Brother(s)/Sister(s), or Dependent Parent(s)/Grandparent(s)).
4. Therefore, your Total Allowances amount to HK$132,000.
5. Net Chargeable Income: To calculate this, subtract your Total Allowances from your Total Income:
   • Net Chargeable Income = Total Income – Deductions – Total Allowances
   • In this case: HK$500,000 – HK$0 – HK$132,000 = HK$368,000.
6. Tax Payable: Based on the Net Chargeable Income of HK$368,000, the tax calculated is HK$44,560.

In summary, after considering your total income, allowances, and deductions, the amount of tax you need to pay is HK$44,560.

The amount of tax you pay is determined by applying the relevant tax rates to your Net Chargeable Income of HK$368,000. Here’s a simplified explanation of how the tax might be calculated:

1. Tax Rates: In Hong Kong, salaries tax is calculated using progressive tax rates. This means different portions of your income are taxed at different rates.
2. Progressive Tax Calculation: Hong Kong’s salaries tax system uses a progressive tax rate structure, which means that different portions of your income are taxed at increasing rates. The tax brackets for the year of assessment 2023/2024 are: For example, the tax rates might look something like this (note that these rates can change):
   • 2% on the first HK$50,000
   • 6% on the next HK$50,000
   • 10% on the next HK$50,000
   • 14% on the next HK$50,000
   • 17% on any income above that
3. Calculation Steps:
   • First HK$50,000: 2% of HK$50,000 = HK$1,000
   • Next HK$50,000 (from HK$50,001 to HK$100,000): 6% of HK$50,000 = HK$3,000
   • Next HK$50,000 (from HK$100,001 to HK$150,000): 10% of HK$50,000 = HK$5,000
   • Next HK$50,000 (from HK$150,001 to HK$200,000): 14% of HK$50,000 = HK$7,000
   • Remaining HK$168,000 (from HK$200,001 to HK$368,000): 17% of HK$168,000 = HK$28,560
4. Total Tax Payable: Adding these amounts together:
   • HK$1,000 + HK$3,000 + HK$5,000 + HK$7,000 + HK$28,560 = HK$44,560.

What Income is Taxable?

The taxable income includes:

• Compensation such as salaries, wages, and director’s fees
• Additional payments including commissions, bonuses, leave pay, end-of-contract gratuities, and payments in lieu of notice accrued on or after April 1, 2012.
• Allowances, perks, and fringe benefits such as cash allowances, employee discharge liabilities, convertible benefits, educational benefits, and holiday journey benefits
• Employer-paid salaries tax
• Termination payments, retirement benefits, including accrued benefits from recognized occupational retirement schemes or receipts from mandatory provident fund schemes
• Pensions
• Retroactive payments like back pay, gratuities, deferred pay, and arrears payments
• Stock awards and share options acquired through holding an office or employment
• Tips received from employers or any other party
• Rental value of employer-provided residential accommodations

Some income is not subject to Hong Kong Salary Tax which include:

• Severance and long-service payments under the Employment Ordinance (up to statutory limits)
• Jury fees
• Income earned outside Hong Kong (if no services were rendered in HK)

Allowable deductions 

Deductions allowable under Salaries Tax and Personal Assessment:

• Outgoings and expenses
• Qualified outgoings and expenses subject to rigorous conditions
• Depreciation and capital allowances applicable to plant and machinery utilized for generating assessable income
• Self-education expenses
• Approved charitable donations
• Contributions made to a Mandatory Provident Fund Scheme or Recognized Occupational Retirement Scheme
• Home loan interest, contingent upon specific qualifying criteria
• Expenses related to elderly residential care

Personal allowances such as: 

• Base pay
• Allowance for married people
• Allowance for children
• Allowance for a dependent brother or sister
• Allowance for dependent parents or grandparents
• Extra allowance for dependent grandparents or parents
• Allowance for single parents
• Individual disability allowance
• Allowance for disabled dependents 

What Income Qualifies as “Hong Kong-earned Income”?

In Hong Kong, the income tax is subject to all the employment income received in or originated in Hong Kong. Your entire income is subject to salary tax if your source of employment is in Hong Kong, meaning that you are hired by a Hong Kong company that operates in Hong Kong.

On an annual basis, you may be eligible to receive complete or partial exemption from income taxes or tax relief under the following conditions:

• Unless you are a civil servant or a member of the crew of a ship or aircraft, you are not required to pay income tax for any year in which all of your services are provided outside of Hong Kong. Tax exemption also applies to earnings from services performed in Hong Kong during visits that don’t last longer than 60 days annually. Authorities evaluate each case individually to determine whether a journey to Hong Kong qualifies as a “visit” or not.
• During the assessment year of your income, if that income has been taxed in another territory, you can seek relief when you calculate your income tax for Hong Kong to avoid excess deductions. That would require foreign tax proof evidence to be furnished.

If you are living in Hong Kong and your source of employment is elsewhere, i.e. you remain employed by your overseas company and are assigned to work in Hong Kong by your overseas employer for a few years; it is only considered as income derived in Hong Kong and you are assessed based on income attributable to the services you deliver in Hong Kong.

Can personal assessment help reduce my tax liability?

If you are only subject to Salaries Tax, personal assessment typically does not reduce your tax liability, as you’re already taxed on a progressive scale. However, for taxpayers with other income sources (e.g., rental or business income), personal assessment could lead to tax savings.

Employer Benefits And Their Tax Treatment 

Any income or payment you receive from your employment is subject to the personal income tax.

These earnings benefit the individual in the sense of employment. The following are common examples of taxable benefits:

• Accommodation and allowance for housing
• Allowance for meal
• Educational Benefits for Dependent Children
• Company-Provided Vehicle
• Allowance for Holiday Travel
• Stock Awards and Options

Please be aware that certain non-cash benefits may be subject to taxation using specific formulas. However, detailed information regarding these procedures is beyond the scope of this guide.

The Nature of Capital Gains Tax and Inheritance Tax (or Estate Duty)

Capital gains mean the income that investors earn while owning property or stocks, bonds, and other kinds of investment assets. Capital gains taxation is not imposed in Hong Kong.

Inheritance taxes or Estate duties are taxed on the total market worth of the asset (cash and non-liquid) of a person at the moment of his/her death. The estate tax in Hong Kong has been eliminated since February 2006.

Claims For Tax Exemption 

Each year of tax, there is a certain amount (an amount that does not require to claim) that is provided for you as a basic allowance. Furthermore, as well, you are allowed to declare the family and dependent allowances. These comprise Married person’s allowance, Child allowance, Dependent brother or sister allowance, Dependent parent and grandparent allowance, Single parent allowance, and Disabled dependant allowance. This claim does not need to be accompanied with any proof when the return is filed. Nevertheless, you should keep the evidence to be able to clarify at any time.

Filling Your Salary Tax Return 

All of the taxpayers having annual tax returns must file them to the Inland Revenue Department (IRD).Even if you don’t have earnings, you still need to declare as zero income when filling out your tax forms. A married couple has an option of filing jointly which would lead to a substantial reduction in their tax burden if their single assessment based on their total income (combined income) results in lower tax liability.

Key Dates To Remember

• Tax Year: The fiscal years go from April 1 to March 31 of the calendar year. 
• Return Issuance: By early  May, IRD finalizes the computation of personal tax returns for each taxpayer. 
• Deadline to file tax return: One month from the issue date 

Filling Options

• Paper or online submission
• Joint filing option for married couples
• Supplementary forms may be required (from April 2019 onward)

How to prepare for tax payment

1. You can use the IRD’s Tax Calculator to find out exactly how much you’ll need to pay up.
2. IRD typically issues the Notice for Salaries Tax Tax at the end of the year. Tax payments can be paid in two installments: the first payment usually due in January; the second payment is usually due in April.

You can allocate some money each month especially to meet the tax payment, and also can utilize IFEC Savings Goal Calculator to make your saving plan. You have another option, the tax reserve certificates provided by the government, which you can use to save up for the tax payments.

How to pay Salary Tax Return if I am a Sole Proprietor or Partner?

If you are the owner of a sole proprietorship business or a partner in a partnership, you will be taxed Profits Tax as a Hong Kong business owner and not Salaries Tax. The salary you give to yourself as a proprietor should not be included in Part 4 (Salaries Tax) of the BIR60 form, but rather in business profits -Item 7 (Assessable Profit) in Part 5 (Profits Tax).

In a partnership, the salary you pay yourself is declared as business profits and recorded on the Profits Tax Returns (BIR52), and should not be re-reported on the BIR60 tax return form under Part 4 (Salaries Tax).

When either of you or your spouse is drawing a salary from your sole-proprietorship or partnership firm, you are not required to submit the Employer’s Return of Remuneration and Pension form (IR56B). You, as a sole proprietor, should also think about submitting the NIL profits tax return if such is possible. Ensure that you get informed on this subject from our NIL profits tax return article.

In what ways does the Salary Tax Return impact me as a business owner?

When you employ your first employee as a Hong Kong employer, your tax obligations will begin whether the employee works in Hong Kong or is working from overseas.

Once an employee is employed, you need to maintain records of their personal details, job details, position details, pay contributions to Mandatory Provident Fund (MPF) contributions, employment agreement and other particulars.

As a Hong Kong employer, you should inform the IRD of any changes in the status of your employee as and when they occur. You should also issue a notice to the IRD if an employee is departing from Hong Kong for some time.

How FastLane Group Can Help?

Hong Kong’s Salary Tax system is relatively simple, but staying on top of deadlines, deductions, and the right method of assessment can save you thousands. Whether you’re a business owner or an employee, navigating Salary Tax in Hong Kong can be complex especially if you have multiple income sources or are new to the system.

Fastlane Group is an established company that has been providing corporate services, accounting, auditing, and taxation advisory services in Hong Kong. Our special is in an area that helps clients in international operations fully tailored to clients’ requirements and situations. 
Our team of experts who excel in the Hong Kong Tax System can help you get started on the taxation process for your business. We offer products as a one-stop solution, corporate incorporation, accounting and bookkeeping, payroll administration, and corporate secretarial services. Contact us now.