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Hong Kong Salaries Tax - General Guidelines on Hhow to Compute Salaries Tax

  1. What income is assessable and what deductions (and allowances) can be claimed under Salaries Tax?

  2. What are the current rates for salaries tax?

  3. How is Salaries Tax computed?

  4. Further to the above Q&A, do I also have to pay Provisional Salaries Tax for the subsequent year of assessment? When do I pay my Salaries Tax and Provisional Salaries Tax?

  5. Under what circumstances can I apply for paying less tax, or for the holding over (deferring payment) of Provisional Salaries Tax?

  6. How can married persons report their salary income?

1. What income is assessable and what deductions (and allowances) can be claimed under Salaries Tax?


The following is only intended to provide an outline of what taxable income, deductions, and allowances are. These terms will be explained further in separate questions and answers in other sub-sections on this website.


(a) Income

According to section 11B of the Inland Revenue Ordinance , the assessable income of a person in any year of assessment shall be the aggregate amount of income accruing to that person from all sources in that year of assessment.


For the purposes of Salaries Tax, the assessable income includes:


(i) Salaries/wages


(ii) Commission, bonus, leave pay, end-of-contract gratuities


(iii) Allowances or perquisites


These include cash allowances for food, traveling, housing, cost of living and education benefits.


(iv) Tips from any person


(v) Salary tax paid by an employer


(vi) The 'rental value' of a place of residence that is either: (a) provided by an employer, or (b) the rent for which is paid or refunded (fully or partially) to the employee by the employer. "Employer" here also includes a corporation associated with the employer


This is taken to be 10% of the income earned from the employer (excluding any lump sum payment or gratuity on termination of employment) after deductions and depreciation allowances (if any) for the period during which the residence is provided.


(vii) Share option gain


This refers to the gain realized by the exercise, the assignment, or the release of a right to acquire shares or stock in a corporation.


(viii) Back pay, gratuities and any terminal/retirement awards


You may apply to have the whole sum of money related back to the earning period for tax assessment (up to a maximum of 36 months).


ix) Certain p ayments received from Mandatory Provident Fund Schemes (MPF) or Recognized Occupational Retirement Schemes (except for those received due to retirement, death or incapacity) attributable to some voluntary contributions by an employer.


Income not chargeable to Salaries Tax (not required to be reported in tax return) includes:


  • fees paid for your having served as a juror;
  • severance payment or long service payment payable by the employer on termination of employment under the Employment Ordinance ;
  • payments received from MPFS on retirement, death, incapacity or termination of service attributable to mandatory contributions.
(b) Deductions and Depreciation Allowances

(i) Outgoings and expenses


To qualify for deduction, the relevant outgoing and expense cannot be of a private or domestic nature and must meet the very stringent conditions of being wholly, exclusively, and necessarily incurred in the production of your assessable income.


(ii) Expenses of self-education


The maximum amount allowable for deduction (as from the year of assessment 2001/02) is $40,000 per year.


(iii) Approved charitable donations


The minimum amount allowable for deduction is $100. The total amount to be deducted for the year (as from the year of assessment 2003/04) should not exceed 25% of your assessable income less the deductions of outgoings and expenses and depreciation allowances. (Note: A maximum of 10% each year for years of assessment prior to 2003/04.)


(iv) Mandatory contributions to MPFS or contributions to Recognized Occupational Retirement Schemes


Contributions made after 1 December 2000 qualify for deduction. Although you may have many sources of income during the year, you can only get a maximum deduction of $12,000 per annum.


(v) Home loan interest (HLI)


As from the year of assessment 1998/99, y ou can get deductions of HLI paid on the mortgage of your home for 7 years of assessment (consecutive years or otherwise) . Following each HLI deduction, the Commissioner will notify you of the number of years for which deduction has been allowed and your remaining entitlement. The maximum amount of deduction for each year (as from the year of assessment 2003/04) is $100,000. [Note: A maximum deduction of $100,000 each year for years of assessment 1998/99 to 2000/01, and $150,000 for 2001/02 and 2002/03.]


(vi) Elderly residential care expenses (ERCE)


You can claim deduction of the ERCE actually incurred by you/your spouse in respect of the residential care for you/your spouse's parent/grandparent who is aged 60 or above at any time in the year of assessment, or who is under 60 but is entitled to claim an allowance under the Government's Disability Allowance Scheme; and is taken care of by a registered residential care home or nursing home situated in Hong Kong . For each year of assessment, the maximum claim for each parent/grandparent is $60,000. In respect of the same dependant, you can claim either Dependent Parent Allowance (see "Allowances" below), or ERCE, but not both . If ERCE and DPA are claimed simultaneously for the same dependant, you will only get a deduction for ERCE for that year.


(vii) Depreciation allowances on plant & machinery


To qualify for such allowances, you must show that the use of the machinery or plant is essential to the production of your income and produce the relevant receipt for inspection, when required. This kind of de preciation allowance, however, is uncommon for salaries tax.


c) Allowances


Year of Assessment 2005/06


HK$


Basic Allowance


100,000


Married Person's Allowance


200,000


Child Allowance (for each of the 1st and 9th child)


40,000


Dependent Brother/Sister Allowance (for each qualified brother/sister)


30,000


*Dependent Parent/Grandparent Allowance (for each qualified parent)


30,000


*Additional dependent parent/grandparent allowance (for each qualified parent)


30,000


Single Parent Allowance


100,000


Disabled Dependant Allowance (for each qualified dependant)


60,000


*Remarks:
With effect from the year of assessment 2005/06, two new allowances are introduced for taxpayers taking care of dependent parents or grandparents aged between 55 and 59. They will be granted a basic allowance of $15,000 a year, with an additional allowance of the same amount if their parents or grandparents are residing with them.


2. What are the current rates for salaries tax?


Tax rates for the year of assessment 2006/07 (also applicable to Personal Assessment):


Net chargeable income
(Total Income íV Deductions íV Allowances)


Progressive rate


on the first $30,000


2%


on the next $30,000


7%


on the next $30,000


13%


Remainder/balance


19%


Net total income (Total Income íV Deductions)


Standard rate: 16%


Note: For 2006/07, 50% of the salaries tax or tax under personal assessment would be waived (subject to the maximum of $15,000 per case). Taxpayers do not need to make any application. They only need to file their Tax Returns - Individuals for 2006-07, and the Inland Revenue Department will effect the waiving in the final assessments for 2006-07 after verification. Salaries tax bills with the waiving will be issued from late July onwards. The tax payable will normally fall due in January 2008. Please also note that t he marginal rates of Salaries Tax for the year of assessment 2007/08 have been reduced.


Salaries Tax is chargeable on your net chargeable income at progressive rate OR your net total income at standard rate, whichever is the lesser . Base on the above table, progressive rate is more advantageous to people with relatively lower income. On the other hand, standard rate will give more concession to people earning relatively higher income (since progressive rate will charge 19%, but not 16%, on the income after the first $90,000).


3. How is Salaries Tax computed?


Suppose you earned a salary of $20,000 and contributed $1,000 to a Mandatory Provident Fund (MPF) Scheme each month from 1 October 2006. The calculation is as follows:


Year of Assessment 2006/07 (i.e. 1/4/2006 íV 31/3/2007)


HK$


Income ($20,000 x 6)


120,000


Less: MPF contributions ($1,000 x 6)


(6,000)


Net Total Income:


114,000


Less: Basic allowance


(100,000)


Net Chargeable Income:


14,000


Salaries Tax at progressive rate @2% on Net Chargeable Income


$280


Salaries Tax at standard rate @16% on Net Total Income


$18,240


Salaries Tax payable (*the smaller amount)


$280


* As mentioned before, Salaries Tax is charged on your net chargeable income at progressive rate, or is charged on your net total income at standard rate, whichever is the lesser.


4. Further to the above Q&A, do I also have to pay Provisional Salaries Tax for the subsequent year of assessment? When do I pay my Salaries Tax and Provisional Salaries Tax?


Yes, the Salaries Tax demand note for you would consist of two components:


2004/05 Salaries Tax
2005/06 Provisional Salaries Tax
Total Salaries Tax payable


$280
$14,800
$15,080


Calculation of "PST" (the short form for "Provisional Salaries Tax") for 2005/06 is based on the income for 2004/05, but grossed up to 12 months, as follows:


Year of Assessment 2005/06 (i.e. 1/4/2005 íV 31/3/2006)


HK$


Income ($20,000 x 12)


240,000


Less: MPF contributions ($1,000 x 12)


(12,000)


Net Total Income:


228,000


Less: Basic allowance


(100,000)


Net Chargeable Income:


128,000


PST at progressive rate on $128,000


 

íV First $30,000 x 2%


600


íV next $30,000 x 8%


2400


íV next $30,000 x 14%


4,200


íV Balance $38,000 x 20%


7,600



14,800


PST at standard rate $228,000 x 16%


36,480


PST payable (the smaller amount)


14,800


My total tax bill is $15,080 ($280 + $14,800). When do I pay? Do I pay by two installments?


Normally you would be asked to pay the sum of $15,080 ($280 + $14,800) by 2 installments as follows:


Amount payable


Due date


1st installment $11,380 ($280 + $14,800 x 75%)


around Jan. 2006


2nd installment $3,700 ($14,800 x 25%)


around April 2006


By 1 January 2006 you would have earned income for 9 months from 1 April 2005 to 31 December 2005 (75% of annual income). By 1 April 2006 you would have earned income for the 12 months to 31 March 2006. Assuming that there is no change on your monthly income on year 2005/06 (comparing with the previous year), paying provisional tax is actually not paying tax in advance, nor paying tax on future income.


5. Under what circumstances can I apply for paying less tax, or for holding over (deferring payment) of Provisional Salaries Tax?


Suppose you got married in July 2005, and your wife does not have any income. In these circumstances, you are entitled to a married person's allowance as from 2005/06. You may pay less tax if you apply for holding over part of the 2005/06 Provisional Salaries Tax ("PST") by providing the particulars of your marriage and of your wife.


Your application must be made in writing and received not later than 28 days before the due date for payment of the PST, or 14 days after the issue of the demand note concerned, whichever is the later.


If the Assessor accepts your application, the amount of PST will be reduced from $14,800 to $560, computed as follows:


Year of Assessment 2005/06


HK$


Net Total Income


228,000


Less: Married person's allowance


(200,000)


Net Chargeable Income


28,000


Tax payable $28,000 x 2% progressive rate


560


What are the other grounds for applying holdover of Provisional Salaries Tax?


You may make an application within the time limit described above if any one of the following conditions can be satisfied:


  • you have a significant reduction in income that is likely to be greater than 10% of the assessed net chargeable income;
  • you have become entitled to a new allowance, e.g. child allowance for a newborn baby;
  • your salary income has ceased; or
  • you have objected to the Salaries Tax assessment for the preceding year.

6. How can married persons report their salary income?


Married persons can choose "separate taxation" or "joint assessment":


(i) Separate taxation

A husband and a wife are treated as separate individuals. Each is required to:


  • complete a tax return,
  • declare his/her income,
  • claim expenses (and deductions), and
  • pay any tax due.
(ii) Joint assessment (applicable only if advantageous)

If the earnings of one spouse are less than his/her tax allowance, there will be some un - utilized allowance when the husband and wife are assessed separately under separate taxation. If a couple chooses to have a "joint assessment", income and allowances for both husband and wife will be added together, and the married person's allowance will be deducted from their joint total income. Obviously, this will result in some savings in tax for the couple.


Hence, where it appears that a joint tax bill may be smaller than your two tax bills added together, both you and your spouse should choose the "joint assessment" option in each of your tax returns. If a joint assessment does not result in less tax, the Assessor will automatically issue separate tax bills to each of you instead.


Please note that there is a time limit for the selection/withdrawal of a joint assessment. After initially choosing to have a joint assessment, should you change your mind and withdraw you selection, you will not be allowed to request a joint assessment again in the same year of assessment.


Any married couple may choose "joint assessment" under Hong Kong Salaries Tax regulations, irrespective of their residential status. The point to note for joint assessment is that both spouses should have income assessable to Hong Kong Salaries Tax for the specific year of assessment in question.



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