Personal Income Tax Planning in Hong Kong
Start with an estimation of your taxable income for the year, know your effective tax rate and plan for your tax payable for the year. The purpose of this guide is to provide information about how to save your personal income tax every year (for tax residents in Hong Kong).
1. For Directors and Shareholders
As a Company director and shareholder, you can consider withdrawing profits from the company either through dividends, Director’s salary, or Director’s fee.
Director’s Salary and Director’s Fee
In general, if you are a director of a Hong Kong resident company, your full income derived from that office in Hong Kong may be chargeable to salaries tax.
Both director’s fee and director’s salary are treated as deductible expenses in the company. Hence, you will pay lesser company income tax if you receive more director’s salary and director’s fee from the company.
Dividends received by the shareholder from a Hong Kong Company are tax exempt. Meaning that shareholders will not be taxed on such dividend income.
You may want to note that dividends do not help companies to reduce corporate tax either as they are paid out from profits after tax.
Question: Should I pay myself dividend, director’s salary, or director’s fee?
It depends on the amount of profit generated by the company.
With effect from 1 April 2018, a two-tiered profits corporate tax rates regime applies. The corporate tax rate for the first HK$2 million of assessable profits will be lowered to 8.25%. Assessable profits above HK$2 million will continue to be subject to the rate of 16.5% for corporations.
Personal tax is charged progressively (2 percent – 17 percent) on your chargeable income. You may refer to the income tax rates.
How much to pay yourself is subject to the profit that company is going to make and how much the personal allowance you can enjoy.
Assuming the company has a taxable profit of HK$2,200,000. Since the first HK$2 million of assessable profit will be taxed at 8.25% and the balance HK$200,000 subject to 16.5%, the tax payable amount is HK$198,000.
If you are paying yourself a remuneration of HK$200,000 and assuming that your other income just utilize all your personal allowance, in this case your personal income will be effectively taxable at 8% only which is amounting to HK$16,000. The company’s taxable profit will be reduced by HK$200,000 and the company tax payable will be reduced from HK$198,000 to HK$165,000. Total tax payable (corporate and personal) will be HK$181,000.
In summary for this example, you can save HK$17,000 income tax by declaring a salary or director fee of HK$200,000.
You may engage our bookkeeping services and income tax services today and we can advise you on the amount to declare for the salary and director fee in order to lower the overall tax payable of your income.
Other Consideration for Declaring Salary and Director Fee
You may consider other factors which may also determine how much salary or director fee you should pay yourself. For example,
– Are you obtaining a loan in the near future? You can get a higher loan quantum if you have declared a higher level of personal income.
– Are you applying for credit card? You can get a higher credit limit if you declared a higher personal income.
2. Maximisation of Tax Deductions
Tax deductions reduce your taxable income. Your total deductions are subtracted from your taxable income in order to compute your total taxable income for the year. Fully utilize the available tax reliefs to save you more taxes. Kindly refer to the complete list of deductions allowable under salaries tax and personal assessment.
Outgoings and Expenses
Only those outgoings and expenses that are wholly, exclusively and necessarily incurred in the production of your assessable income in Hong Kong is tax deductible Expenses of a domestic or private nature and capital expenditure are not tax deductible.
Examples of Allowable Expenses, provided that they are wholly, exclusively and necessarily incurred in the production of assessable income:
- Commission-payment for services
- Entertainment expenses incurred in entertaining clients
- Payment to assistants
- Subscriptions paid to professional societies
- Travelling expenses
You can claim up to HK$100,000 on the expenses of self-education which are defined to include fees, including tuition and examination fees, in connection with a prescribed course of education, examination fees set by an education provider, or trade, professional or business association. The course of education or the examination undertaken should be for gaining or maintaining qualifications to be used in any employment. Fees that have been reimbursed or are reimbursable by an employer are not allowable.
Approved Charitable Donations
A person who have made approved charitable donations during any year of assessment is allowed a deduction in respect of the aggregate amount of the approved charitable donations, provided that the aggregated amount is not less than HK$100. Deduction limit is set at 35% of his/her assessable income.
Elderly Residential Care Expenses
For each year of assessment, a deduction can be claimed for elderly residential care expenses paid by the person or his/her spouse to a residential care home in respect of his/her or his/her spouse’s parent or grandparent, subject to a maximum of HK$100,000 for each parent or grandparent.
This is on the conditions that:
- the parent/grandparent is aged 60 or above at any time in the year of assessment, or under 60 but entitled to claim an allowance under the Government’s Disability Allowance Scheme; and
- the residential care home is situated in Hong Kong and is licensed or exempted from licensing under the Residential Care Homes (Elderly Persons) Ordinance, or Residential Care Homes (Persons with Disabilities) Ordinance, or is a nursing home registered under the Hospitals, Nursing Homes and Maternity Homes Registration Ordinance.
Home Loan Interest
For each year of assessment, home loan interest that you pay for the acquisition of a dwelling situated in Hong Kong and any car parking space located in the same development of the dwelling can be deducted from your assessable income, subject to a maximum limit of HK$100,000.
Contribution to Recognized Retirement Schemes
You can claim deductions for compulsory contributions made to a compulsory provident fund scheme or contributions to a recognized occupational retirement scheme. Currently, the maximum deduction for each year of assessment is HK$18,000.
3. Keep Documents and Records
Every supporting documents and records to your Tax Returns (e.g. course fee receipts, home loan documents) need to be kept for 7 years. For receipts or bills that are less inky, do make a photocopy.
The Inland Revenue Department may make a request for the supporting documents in the event of a compliance review. Estimates and improper records are not acceptable.
4. Get Professional Help
Consider hiring a certified accountant and tax advisor like 3E Accounting to assist you in planning and preparing taxes effectively. 3E Accounting could help you to lawfully maximize deductions and reliefs that are specific to your situation which could bring significant savings in the long run.
Should you have any questions regarding Personal Income Tax Planning, please e-mail us at firstname.lastname@example.org for a no-obligation consultation.