In this article we will be discussing the meaning of personal assessment in terms of Hong Kong tax and the tax system of it.
Content Outline
What is 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 the Profits Tax, Property Tax and/or Salaries Tax, he/she can make a further option of personal assessment or not. It is crucial to remember that there is no point to the personal assessment when the assessment is on Salaries Tax only.
If you choose to elect for personal assessment, there will only be one tax assessment instead of separating assessments under Salaries, Profits and/or Property Taxes.
All of the revenue that falls under the area of the three tax types is assessed on a single basis at either a standard rate of 15% or progressive rates that range from 2% – 17%. Then tax amount will be determined at the lower amount in accordance to the two results of calculation. This computational method may result in a low tax liability if it is implemented on the level of a person individually as compared to separate assessments.
Related Article: 2024 Tax Filing Season: Tax Deadline 2024 in Hong Kong You Need To Know About
Who qualifies for personal tax assessment in Hong Kong?
From the year of assessment 2018/19 onwards, an individual may elect for personal assessment if:
(1) they are adult of 18 years of age or more, or younger adults if both parents are deceased; and
(2) they are either ordinary residents (residing in Hong Kong normally) or temporary residents.
What are the available deductions and allowances under personal tax assessment?
For personal assessment, you can subtract the following from your aggregated income:
- Interest paid on loans used to purchase property that are rented out.
- Donations made to approved charitable organizations.
- Expenses related to self-education.
- Costs associated with elderly residential care.
- Home loan interest.
- Mandatory Provident Fund (MPF) contributions.
- Contributions to licensed retirement schemes.
- Premiums paid for Voluntary Health Insurance Scheme (VHIS) policies.
- Voluntary contributions (TVC) made towards annuity premiums and MPF premiums, which are tax-deductible.
- Business losses incurred during the year of assessment (YA).
- Personal allowances.
- Basic allowance: This is available to all taxpayers, unless they’ve claimed the Married Person’s allowance.
- Married Person’s allowance: Specifically for married taxpayers.
- Child allowance: For each child under the taxpayer’s care.
- Dependent Brother/Sister allowance: If the taxpayer is supporting a dependent sibling.
- Dependent Parent/Grandparent allowance: If the taxpayer is supporting a dependent parent or grandparent.
- Single Parent allowance: For single parents who are providing for their children.
- Disabled Dependent allowance: If the taxpayer is supporting a dependent who is disabled.
- Personal Disability allowance: For taxpayers who have disabilities.
What is the tax rate used for personal assessment?
The amount deduced from the personal exemption and deductions granted is the Net Chargeable Income. The net chargeable income will be taxed at the same progressive rates as the Salaries Tax rates, which are:The net chargeable income will be taxed at the same progressive rates as the Salaries Tax rates, which are:
| Net Chargeable Income (in HKD) | Rate |
|---|---|
| 0-50,000 | 2% |
| 50,001-100,000 | 6% |
| 100,001-150,000 | 10% |
| 150,001-200,000 | 14% |
| Above 200,001 | 17% |
The other option is that the taxpayer’s balance after own taxes deductions but not personal allowances, (known as net assessable income) will be taxed at the standard rate of 15%.
The tax would be charged at the lower amount from the two tax calculations made above. In case you paid tax on the income that was assessed, you would be credited for the tax already paid. In case you paid too much tax below your assessed tax, a refund of the difference will be made.
Can personal assessment help reduce my tax liability?
The situation relies on the following aspects:
- The total amount and the types of income you have received.
- The total amount of eligible deductions and personal allowances you are entitled to claim.
- Whether you have incurred any losses from a sole proprietorship or partnership business.
To put it shortly, in many instances, it is also beneficial to opt for personal evaluation. Nevertheless, because the progressive tax rate of 17% is too high comparing to the standard rate of 15% applied on property rentals and profits from the business operations which are assessed separately, it could be disadvantageous for taxpayers with a large income to choose the personal assessment. You may check the computing samples below.
Treatment of married couples under personal assessment
Starting the year 2018/19, married people have a choice of being separately assessed from their spouse or jointly assessed with their spouse.
If spouses choose the married joint assessment, their income will be assessable to tax. For tax purpose, a joint chargeable income of an individual will be aggregated with that of their spouse and only then can a net joint income can be derived.
The Tax is then proportionally apportioned among the spouses’ income in accordance with each’s (individual) earnings. It will be issued that notice of assessment to both spouses.
Computing examples
If the taxpayer is subject to profits tax and has business profits.
As a marriage status single person, the calculation of his taxable income for the fiscal year 2021/22 amounts to $280,000, which is his assessable profit from his sole-proprietorship business. In that year, he purchased a property that he used as his housing. By 31 March 2022, he paid the interest on a bank loan secured over a mortgage on that dwelling at the amount of $60,000.
If Not Elected For Personal Assessment
| $ | |
|---|---|
| Assessable profits | 280,000 |
| Profits tax payable (at standard rate of 15%) | 42,000 |
| Less: 100% tax reduction (capped at $10,000) | 10,000 |
| Tax payable | 32,000 |
If Elected For Personal Assessment
| $ | $ | |
|---|---|---|
| Assessable profits | 280,000 | |
| Less: Home loan interest | 60,000 | |
| Less: Basic allowance | 132,000 | 192,000 |
| Net chargeable income | 88,000 | |
| Tax thereon (at progressive rates) | 3,280# | |
| Less: 100% tax reduction | 3,280 | |
| Tax payable | 0 |
#Calculating tax using the standard rate of 15% results in a tax of $33,000, which is higher than the $3,280 tax calculated under the progressive rate. Therefore, the tax of $3,280 is applied.
If he chooses personal assessment, he can deduct home loan interest and personal allowance, resulting in total tax savings of $32,000 (i.e. $32,000 – $0).
If the taxpayer is subject to salaries tax and profits tax.
Another scenario with a marriage status single person, in the year of assessment 2021/22, she received a salary of $360,000 from his employment and earned $280,000 in assessable profits from his sole proprietorship business.
If Not Elected For Personal Assessment
| $ | |
|---|---|
| Assessable profits | 280,000 |
| Profits tax payable (at standard rate of 15%) | 42,000 |
| Less: 100% tax reduction (capped at $10,000) | 10,000 |
| Tax payable | 32,000 |
| Salaries income | 360,000 |
| Less: Basic allowance | 132,000 |
| Net chargeable income | 228,000 |
| Tax thereon (at progressive rates) | 20,760 |
| Less: 100% tax reduction (capped at $10,000) | 10,000 |
| Salaries tax payable | 10,760 |
| Total Tax Payable ($32,000 + $10,760) | 42,760 |
If Elected For Personal Assessment
| $ | |
|---|---|
| Assessable profits | 280,000 |
| Salaries income | 360,000 |
| Total income | 640,000 |
| Less: Basic allowance | 132,000 |
| Net chargeable income | 508,000 |
| Tax thereon (at progressive rates) | 68,360 # |
| Less: 100% tax reduction (capped at $10,000)* | 10,000 |
| Tax payable | 58,360 |
If elected for personal assessment, an additional $15,600 ($58,360–$42,760) of tax will need to be paid, due to:
- The tax is computed and assessed proportionally on his income from all sources and it is therefore a form of personal assessment. The highest tax rate he has been charged with is 17%, more than the standard rate of tax which is 15% and applies separately to his business profits.
- The personal assessment tax is only levied at the rate of $10,000 and is once applicable, whereas under both profits tax and salary tax it is entitled twice.
How can FastLane Group help?
If you are looking for tax-related or financial advisory service in Hong Kong, contact FastLane Group. Our team of experienced professionals is able to offer personalized advice and solutions aimed at assisting you in meeting your tax obligations in an efficient and effective manner. Feel free to contact us now to find out more about our services and how we can help you achieve your financial objectives.