Understanding the Hong Kong Salary Tax

Personal tax is commonly known as salary tax in Hong Kong. This article will guide you on Hong Kong Salary Tax system such as tax rate and tax bracket. This will introduce you to the salary tax rates, tax allowances as well as the right allowance that qualifies as deductions, tax exemptions that employers can benefit from, and the procedures of filing returns.

Being amongst the lowest rates of corporate and personal taxes in the world. Hong Kong has interesting income tax facts and we will explain more about it in this article. 

In addition to the flat corporate tax rate, the Hong Kong tax policy is an example of a progressive tax rate. It is categorized into five tax brackets that carry the rate of 2%, 6%, 10%, 14%, and 17%.

The following features are the characteristics of Hong Kong’s income tax:

• 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. To the contrary, the lowest tax rate shall be a flat one, at 15 per cent, of the net income, whichever is smaller, starting from the fiscal year 2013/14 and onwards.
• 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.
• In Hong Kong, the tax system is territorial one where the individuals are only liable for the taxes received within the boundaries of the country, or profits earned from activities conducted in Hong Kong. This means that income earned outside the territory of Hong Kong will generally not be levied by the local authorities within that jurisdiction.
• Individual taxpayers who reside in Hong Kong may be able to lower their tax liability by choosing personal assessment. Tax is calculated at progressive tax rates on the total amount of income received from all sources under personal assessment. This guide’s later sections on income tax and tax rates in Hong Kong have more specific information on this.

The fiscal year in Hong Kong runs from April 1st to the following March 31st and is an overlapping term used to describe this timespan. The designated time span is the one used for calculating the taxable incomes of people and businesses. This period also provides the appropriate time for individual taxpayers and business owners to pay what they owe to the government.

Net Chargeable Income Calculation

Hong Kong Salary Tax Rates

Hong Kong dollar is estimated at HKD 7.8 for USD 1 and this conversion rate will be used as the standard for comparison for this article.

Income 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.

Net Chargeable Income = Income – Deductions – Allowances

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

The total 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

Non-assessable income includes:

• Being in tax exemption, the severance payments and long service payments that go together with the Employment Ordinance are not assessable records. Hong Kong Salary Tax is applied to any sum that exceeds an employee’s entitlement as per the Employment Ordinance.
• Jury fees.

Allowable deductions and allowances include:

Deductions allowable under Hong Kong Salary 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 include:

• 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 Hong Kong 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.

Employer Benefits And Their Tax Treatment

Any income or payment you receive from your employment is subject to the personal Hong Kong Salary 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.

Personal Tax Return Filing

All of the taxpayers having annual tax returns must file them to the Inland Revenue Department (IRD).

The fiscal years go from April 1 to March 31 of the calendar year. By May 1, IRD finalize the computation of personal tax returns for each taxpayer. Usually, the tax returns have to be provided within one month after the issue date. 

Please also be aware that in cases when your earnings have been equal to zero, 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.

From 1 April 2019 onwards, 3 supplementary forms, which are to be listed in the return, should be filed at the same time as the return.

If you are a sole proprietor of a company, your file can be submitted within 3 months from the date of issuance. You can file online or by postal mail if you want to deduct your taxes. Following you have submitted your taxes, you will get a ‘Notice of Assessment’ or tax bill from the Inland Revenue Department which will be mailed to your given address. The return will show the amount of tax you have to pay for the tax that is due for the assessment year. The notice will further indicate the estimate of provisional salaries tax payable for the ensuing year of assessment.

If you are not satisfied with the tax bill, you should provide information to the related tax office notifying the reason for your rejection within 30 days starting from the date of your tax bill. Before any opposition claims are made by you, the tax must be paid on or before the date registered on the notice of assessment.

In case of delay, the Commissioner of Inland Revenue may penalize or issue an assessment notice which forms the deemed assessment of the return.

Hong Kong’s Tax System and Investment Environment

A well-moderated tax system with low personal income tax rates has increased Hong Kong’s ranking as one of the competitors of mainland China and other countries in the region as it remains an appealing destination to foreign professionals.

Similarly to a lot of the developed western countries, Hong Kong does not have a capital gains tax in place and this contributes to a dynamic of investments by the citizens of the nation and the foreigners.

What FastLane Group Can Offer?

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.