Hong Kong’s Salaries Tax – Key Features That Everyone Must Take Note
Hong Kong’s Salaries Tax – both corporate and personal salary tax – is among the lowest tax rates in the world.
Why is Hong Kong’s tax on salaries is different from many other countries in the world? While it’s corporate tax may be charged at a flat rate, its salaries taxes work differently. Further, Hong Kong’s salaries tax (also referred to as personal tax) follows a progressive tax rate system which comprises of four marginal tax brackets.
Hong Kong’s salary tax bracket is charged at 2%, 7%, 12%, and 17%. The progressive tax rates are charged upon an individual’s net chargeable income. It could follow the four tax percentage structures, or be charged a standard rate of 15% on an individual’s net income or whichever is considered lower. Net income is the income that is left after deductions.
Other key features of Hong Kong’s salary tax includes:
- No capital gains tax (income related to bonds, real estate or stocks in Hong Kong)
- No dividend tax
- There is no inheritance tax
- Individuals in Hong Kong are only taxed on the income which they earn in Hong Kong.
- Year of assessments for taxes in Hong Kong is from 1 April to 31 March of the following year.
Individuals in Hong Kong can minimise their tax burden if they were to opt for personal assessment. Under this assessment, the taxes are then calculated at progressive tax rates based on the aggregated income from all sources.
Definition of Earned Income in Hong Kong
Hong Kong’s salaries tax is applicable to all employment income which has been earned in Hong Kong. If you work for a Hong Kong company, this means that your employment source originates from Hong Kong. Therefore, your income is considered chargeable to Hong Kong salaries tax.
It is possible to claim either full or partial tax exemption or tax relief on your Hong Kong salaries tax if you fall under the following conditions:
- If all your services have been rendered outside Hong Kong for the year of assessment (unless you are a crew member of a ship, aircraft or civil servant).
- Income of services rendered within Hong Kong during your visits does not exceed 60 days in a year.
- If part of your income has already been taxed by another territory during the year of assessment (eligible for partial tax exemption on your Hong Kong salaries tax). Evidence must be provided for this one.
If you are assigned to work in Hong Kong by an overseas company, you will only be assessed on the income attributed to the services which you render in Hong Kong.
How Personal Income Tax Rates in Hong Kong Work
The progressive tax rates on which an individual’s net income will be charged is based on the following structure:
- Income of HKD 0 – 40,000 = 2%
- HKD 40,001 – 80,000 = 7%
- HKD 80,000 to 120,000 = 12%
- Above HKD120,001 = 17%
Total income in Hong Kong comprises of the following:
- Salaries (wages and director’s fees)
- Leave pay
- End-of-contract gratuities
- Fringe benefits (cash allowances, education benefits, convertible benefits, holiday benefits, etc)
- Termination of payment
- Back pay
- Deferred pay
- Stock awards (from holding an office or employment)
- Share options (from holding an office or employment)
- Retirement benefits (benefits accrued from mandatory provident fund schemes, or from recognised occupational retirement schemes)
- Rental value of residence which is provided by the employer
- Any tips receive from your employer or any other persons
Non-assessable Income in Hong Kong
- Any payment which has been received in lieu of notice from an employer (must be in accordance with the terms of the Employment Contact or Employment Ordinance Provisions). If the employer provides sufficient termination notice, and the said employee carries out their duties as required while serving that notice period, then the salary which is received for that notice period is considered taxable.
- Minimum severance payments and long service payments which are payable under the Employment Ordinance are not deemed assessable income. If the amount is more than the employee’s entitlement based on the Employment Ordinance, then it will be considered assessable salaries tax.
Allowable Deductions in Hong Kong
- Any charitable donations which have been approved
- Expenses incurred during self-education
- Expenses during qualified employment (client entertainment, selected business travel expenses, subscriptions to selected professional societies)
- Interest from home loans (subjected to certain qualifying conditions)
- Expenses related to elderly residential care
- Any contributions made to the Mandatory Provident Fund Scheme or Recognised Occupational Retirement Scheme.
- Depreciation and capital allowance for plant and machinery which may have been used to generate assessable income in Hong Kong.
Personal Allowances in Hong Kong
- Allowance for a married person(s)
- Basic allowance
- Child allowance
- Dependent sibling allowance
- Dependent parent allowance or dependent grandparent allowance
- Single parent allowance
- Disable dependent allowance
Taxable Benefits in Hong Kong
Most of the profits and gains that you acquire from your employment in Hong Kong are taxable. However, these non-cash benefits from your employer have a different tax formula. Further, examples of these tax benefits include:
- Meal allowances
- Housing and accommodation allowance
- Share options
- Holiday allowances
- Company cars
- Educational benefits for your children
How to File Your Personal Tax Returns in Hong Kong
Hong Kong’s year of assessment is from 1 April to 31 March of the following year. Moreover, the Inland Revenue Department (IRD) oversees the tax system in Hong Kong. The IRD will issue individual tax returns by 1 May. You must submit all tax returns to the IRD one month before the date of issue.
If you do not have an income to report, you must still fill out your income tax form. You must then declare zero income on said form. Meanwhile, married couples in Hong Kong can opt for a joint assessment if the single assessment which is based on their combined income will result in less tax liability.
Sole proprietors in Hong Kong must file their tax returns within 3-months from the date of issue. You can file tax returns either online or through a post. Once you have successfully filed your taxes, you will receive a “Notice of Assessment” or tax bill from the IRD.
The amount of tax that you will be liable to pay for that year of assessment will be indicated on your tax bill. However, if you disagree with the amount, you must inform IRD within 30 days from the date of issue for your tax bill. You must then declare the reasons for your disagreement.