Calculating payroll deductions in Hong Kong involves several key components, each governed by specific regulations. This article breakdown different components and teaches you what it means and how to calculate.
Content Outline
What Is Payroll Deductions?
Payroll deductions are amounts withheld from an employee’s gross pay to cover various obligations and benefits. These deductions are categorized as either mandatory or voluntary and are essential in determining the employee’s net pay.
Mandatory Payroll Deductions
Employers in Hong Kong are required to make the following deductions from employees’ salaries:
1. Mandatory Provident Fund (MPF) Contributions:
- Employee Contribution: 5% of the employee’s relevant income, capped at HKD 1,500 per month.
- Employer Contribution: An additional 5% of the employee’s relevant income, also capped at HKD 1,500 per month.
- Income Thresholds:
- Minimum Relevant Income: Employees earning less than HKD 7,100 per month are not required to contribute, but employers must still contribute 5% of the employee’s income.
- Maximum Relevant Income: Contributions are capped for employees earning HKD 30,000 or more per month.
- Tax Deduction: Employees can claim a tax deduction for mandatory contributions, up to HKD 18,000 per year.
2. Salaries Tax:
- While employers do not withhold salaries tax from employees’ pay, employees are responsible for filing their own tax returns and paying any taxes due.
- The Inland Revenue Department (IRD) assesses salaries tax based on income from employment, office, and pension arising in or derived from Hong Kong.
Voluntary Payroll Deductions
Employees may opt for additional deductions to enhance their retirement savings:
1. Voluntary MPF Contributions:
- Employees can choose to contribute more than the mandatory 5% to their MPF accounts.
- These contributions are not tax-deductible unless made to a Tax Deductible Voluntary Contributions (TVC) account.
2. Tax Deductible Voluntary Contributions (TVC):
- TVCs are additional contributions to the MPF system that are eligible for tax deductions.
- The combined maximum tax deduction for TVCs and qualifying deferred annuity premiums is HKD 60,000 per year.
Step-by-Step Payroll Deduction Calculation
- Determine Gross Income:
- Include basic salary, bonuses, allowances, and other taxable benefits.
- Calculate MPF Contributions:
- Deduct 5% of the employee’s relevant income (capped at HKD 1,500) for the employee’s MPF contribution.
- Compute Net Income:
- Subtract the employee’s MPF contribution from the gross income.
- Apply Deductions and Allowances:
- Deduct allowable expenses (e.g., charitable donations, self-education expenses) and personal allowances (e.g., basic allowance of HKD 132,000 for single individuals, HKD 264,000 for married persons).
- Calculate Salaries Tax:
- Compute tax liability using both the progressive rates on net chargeable income and the standard rate on net total income.
- Choose the method that results in a lower tax payable.
- Determine Net Pay:
- Subtract the calculated salaries tax from the net income to arrive at the final take-home pay.
Payroll Deduction Calculation Example
Here’s a full calculation example based on a Hong Kong employee earning HKD 25,000 per month.
📌 Step 1: Determine Gross Income
- Basic Monthly Salary: HKD 25,000
- Annual Salary: HKD 25,000 × 12 = HKD 300,000
📌 Step 2: Calculate MPF Contributions
- Employee Contribution: 5% of HKD 25,000 = HKD 1,250 per month (Capped at HKD 1,500, so no cap applied here)
- Annual Employee MPF Contribution: HKD 1,250 × 12 = HKD 15,000
👉 Deduct MPF from gross salary to calculate net total income.
📌 Step 3: Compute Net Total Income
- Annual Net Income = HKD 300,000 – HKD 15,000 = HKD 285,000
📌 Step 4: Apply Personal Allowance
- Basic Allowance: HKD 132,000 (Standard for a single individual)
- Net Chargeable Income = HKD 285,000 – HKD 132,000 = HKD 153,000
📌 Step 5: Calculate Salaries Tax
Method 1: Progressive Tax Rates on Net Chargeable Income
| Income Bracket | Tax Rate | Tax Payable |
|---|---|---|
| First HKD 50,000 | 2% | HKD 1,000 |
| Next HKD 50,000 | 6% | HKD 3,000 |
| Next HKD 50,000 | 10% | HKD 5,000 |
| Remaining HKD 3,000 | 14% | HKD 420 |
| Total | HKD 9,420 |
Method 2: Standard Rate (15%) on Net Total Income
- HKD 285,000 × 15% = HKD 42,750
✅ Choose the lower amount → Salaries Tax Payable = HKD 9,420
📌 Step 6: Calculate Final Take-Home Pay
| Description | Amount (HKD) |
|---|---|
| Annual Gross Income | 300,000 |
| – MPF Contributions | (15,000) |
| – Salaries Tax | (9,420) |
| Final Take-Home Pay | 275,580 |
✅ Final Result
- Monthly Take-Home Pay ≈ HKD 275,580 / 12 = HKD 22,965
How Can FastLane Help?
FastLane is one of the best payroll service provider in Hong Kong, being well-versed in Hong Kong employer ordinance and MPF regulations.
Whether if it’s part time rosters, or commission schemes that gets your payroll complicated, we will get the job done.
