Hong Kong operates a simple and low-tax system, primarily based on a territorial principle. This means that generally, only income arising in or derived from Hong Kong is subject to tax. The main tax on employment income is Salaries Tax, which is levied on income from employment, pensions, and offices. Unlike many jurisdictions, Hong Kong does not have a comprehensive social security tax system or a standard Pay As You Earn (PAYE) withholding mechanism for Salaries Tax.
Employers in Hong Kong have specific obligations related to their employees' income and contributions, primarily centered around the Mandatory Provident Fund (MPF) scheme and the reporting of employee earnings to the Inland Revenue Department (IRD). Understanding these requirements is crucial for compliance and smooth payroll operations.
Employer Social Security and Payroll Tax Obligations
Hong Kong's primary mandatory contribution scheme is the Mandatory Provident Fund (MPF). This is a compulsory retirement savings scheme for employees and employers in the private sector.
Mandatory Provident Fund (MPF)
Both employers and employees are required to contribute to registered MPF schemes. Contributions are calculated based on the employee's relevant income.
- Contribution Rates:
- Employer: 5% of the employee's relevant income.
- Employee: 5% of the employee's relevant income.
- Relevant Income Thresholds (as of current understanding for 2025):
- Minimum Relevant Income: HKD 7,100 per month. If an employee's relevant income is below this threshold, the employee is not required to contribute, but the employer's contribution is still mandatory.
- Maximum Relevant Income: HKD 30,000 per month. Contributions are capped based on this amount. For income above this threshold, mandatory contributions are calculated only on the first HKD 30,000.
- Calculation:
- For monthly-paid employees, contributions are calculated monthly.
- For employees paid on other cycles (e.g., daily or weekly), the relevant income is calculated based on the total income earned during the contribution period.
- Voluntary Contributions: Employers and employees may make voluntary contributions above the mandatory levels.
- Exemptions: Certain individuals are exempt from the MPF scheme, including domestic helpers, self-employed persons under specific circumstances, and employees from outside Hong Kong who are covered by an overseas retirement scheme or who are entering Hong Kong for employment for a limited period.
Employers are responsible for deducting the employee's mandatory contribution from their wages and remitting both the employer's and employee's contributions to the MPF trustee by the contribution day (the 10th day of the month following the payroll period).
Income Tax Withholding Requirements
Hong Kong does not operate a standard monthly income tax withholding system (PAYE) for Salaries Tax. Employers are generally not required to deduct Salaries Tax from their employees' monthly salaries unless specifically instructed to do so by the Inland Revenue Department (IRD).
The primary obligation for employers regarding Salaries Tax is the accurate reporting of employee income to the IRD.
- Annual Employer's Return: Employers must file an annual Employer's Return (Form IR56B) for each employee who earned income during the year of assessment (which runs from 1 April to 31 March). This form details the employee's total income, benefits, and MPF contributions for the year.
- Reporting Employee Cessation: When an employee ceases employment, the employer must file Form IR56F.
- Reporting Employee Leaving Hong Kong: If an employee is leaving Hong Kong for a period exceeding one month, the employer must file Form IR56G one month before the expected departure date. In this case, the employer is required to withhold all money due to the employee (salary, leave pay, etc.) until the IRD issues a "Letter of Release" confirming that the employee's tax obligations have been settled or arranged.
Failure to file these returns accurately and on time can result in penalties for the employer.
Employee Tax Deductions and Allowances
Employees in Hong Kong are subject to Salaries Tax on their employment income. Their tax liability is calculated based on their net assessable income after deducting allowable expenses, charitable donations, and mandatory MPF contributions, and then applying personal allowances.
Tax is calculated using one of two methods, whichever results in a lower tax liability:
- Standard Rate: A flat rate applied to the net assessable income (total income less deductions).
- Progressive Rates: Applied to the net chargeable income (net assessable income less personal allowances).
Common allowances and deductions available to employees include:
- Personal Allowances: Basic allowance, married person's allowance, child allowance, dependent parent/grandparent allowance, dependent brother/sister allowance, dependent child allowance, etc. These amounts are fixed annually.
- Deductions:
- Mandatory contributions to recognized retirement schemes (primarily MPF).
- Approved charitable donations (minimum HKD 100).
- Allowable expenses incurred wholly, exclusively, and necessarily in the production of employment income (e.g., professional body subscriptions, certain training expenses).
- Home loan interest.
- Rent paid by the tenant.
- Qualifying premiums paid under the Voluntary Health Insurance Scheme (VHIS).
- Qualifying annuity premiums and tax deductible MPF voluntary contributions.
- Domestic rent deduction.
- Elderly residential care expenses.
- Contributions to the Hong Kong Housing Society and the Hong Kong Housing Authority.
Employees are responsible for filing their individual tax returns and claiming applicable allowances and deductions.
Tax Compliance and Reporting Deadlines
Compliance with tax obligations involves timely filing of returns by both employers and employees.
- Employer's Annual Return (Form IR56B): Typically issued in April each year. The deadline for filing is usually one month from the date of issue (e.g., by the end of May). An extension is often granted for returns filed electronically.
- Employer's Returns for Cessation/Leaving Hong Kong (IR56F/IR56G): Must be filed one month before the employee's cessation date or departure date.
- Employee's Individual Tax Return: Issued in May each year. The deadline for filing is typically one month from the date of issue (e.g., by early June). An extension is usually granted for electronic filing.
The IRD may issue tax assessments based on the information provided. Tax payments are typically due in two instalments, usually in January and April of the following year.
Special Tax Considerations for Foreign Workers and Companies
Hong Kong's territorial basis of taxation is particularly relevant for foreign workers and companies.
- Foreign Workers: Individuals are subject to Salaries Tax only on income arising in or derived from Hong Kong. If an employee works partly in Hong Kong and partly overseas, their income may be apportioned based on the number of days worked in Hong Kong. Income for services rendered entirely outside Hong Kong is generally not taxable in Hong Kong, even if paid by a Hong Kong employer. There are specific rules and exemptions, such as for visitors who stay for no more than 60 days in a year of assessment.
- Non-Resident Employers: A non-resident employer with employees working in Hong Kong is still required to comply with the employer's obligations, including filing employer's returns (IR56B, IR56F, IR56G) and making MPF contributions for eligible employees.
- Double Taxation Agreements (DTAs): Hong Kong has a network of DTAs with various countries. These agreements aim to prevent double taxation of income and may provide relief or specific rules for individuals working across borders. The provisions of a relevant DTA can impact the tax treatment of foreign workers.
Understanding the source of income is critical for foreign workers and their employers to determine Hong Kong tax liability. Proper documentation of work locations and periods is essential.
