2025/26 Budget Tax Measures: A List of Benefits for the Middle Class and Action Steps

On 26 February 2025, Hong Kong Financial Secretary Paul Chan delivered the 2025/26 Budget, a document released against the backdrop of a projected consolidated deficit of HKD 87.2 billion for the 2024/25 fiscal year and a cumulative fiscal deficit expected to exceed HKD 300 billion over the next three years. For the territory’s middle class—a cohort comprising roughly 1.5 million salary taxpayers contributing over 60% of total salaries tax revenue according to Inland Revenue Department (IRD) statistics for the 2023/24 tax year—the Budget’s tax measures represent a calibrated mix of relief and restraint. While the headline concession of a 100% salaries tax waiver capped at HKD 1,500 provides modest relief, the Budget also signals a structural shift: the standard tax rate for salaries tax on net chargeable income exceeding HKD 5 million will rise from 15% to 16% for the 2025/26 tax year, effective from assessments due in 2026/27. This article examines the key provisions affecting Hong Kong’s middle class, self-employed professionals, and small business owners, offering a practical guide to the changes and actionable steps for the year ahead.

Salaries Tax Relief and the New Top-Tier Rate

The Standard Concession: 100% Waiver with a HKD 1,500 Cap

For the 2025/26 tax year, the government has proposed a one-off waiver of 100% of salaries tax and tax under personal assessment, subject to a ceiling of HKD 1,500 per case. This is a reduction from the HKD 3,000 cap applied in the 2024/25 Budget, reflecting the government’s tighter fiscal position. The waiver applies to tax payable for the year of assessment 2025/26, meaning taxpayers will see the benefit when filing their 2025/26 tax returns in 2026.

For a middle-class salary earner with an annual income of HKD 600,000, the standard salaries tax liability, after the basic allowance of HKD 132,000 and the progressive rates (2% on the first HKD 50,000, 6% on the next HKD 50,000, 10% on the next HKD 50,000, 17% on the remaining HKD 318,000), would be approximately HKD 67,060. The HKD 1,500 cap means the actual relief is marginal—roughly 2.2% of the tax bill. For higher earners whose tax exceeds the cap, the waiver provides a fixed HKD 1,500 reduction, irrespective of income level.

The New 16% Standard Rate on High Incomes

A more consequential change is the introduction of a new two-tiered standard rate structure for salaries tax. Previously, the standard rate was a flat 15% on net chargeable income (after deductions but before allowances). Effective from the 2025/26 tax year, the standard rate will remain at 15% for the first HKD 5 million of net chargeable income, but will increase to 16% on any portion exceeding HKD 5 million.

This change targets approximately 12,000 high-income taxpayers, according to government estimates, and is expected to generate an additional HKD 910 million in revenue annually. For a taxpayer with net chargeable income of HKD 10 million, the tax under the standard rate method would be calculated as: (HKD 5 million × 15%) + (HKD 5 million × 16%) = HKD 750,000 + HKD 800,000 = HKD 1.55 million. Under the old regime, the same income would have been taxed at HKD 1.5 million (HKD 10 million × 15%), representing an additional HKD 50,000 in tax.

The IRD’s Interpretation and Practice Notes (various) confirm that taxpayers will continue to be assessed under the lower of the progressive rates or the standard rate. For most middle-class earners, the progressive rates will remain the binding constraint, meaning the new top-tier rate will not affect them directly. However, for self-employed professionals or business owners with fluctuating income, the threshold of HKD 5 million net chargeable income may be crossed in high-earning years, requiring careful year-end planning.

Property Tax and Rates Concessions

Property Tax Waiver and Its Interaction with Salaries Tax

For the 2025/26 tax year, the government has also proposed a 100% waiver of property tax, capped at HKD 1,500 per property. Property tax is levied at a standard rate of 15% on the net assessable value of rental income, after a 20% statutory deduction for repairs and outgoings. For a landlord with a single residential property generating annual rent of HKD 240,000, the property tax liability would be: (HKD 240,000 × 80%) × 15% = HKD 28,800. The HKD 1,500 waiver reduces this to HKD 27,300.

A critical interaction exists for landlords who elect personal assessment under Section 41 of the Inland Revenue Ordinance (Cap. 112). Under personal assessment, property tax paid can be offset against salaries tax or profits tax, but the waiver reduces the amount available for offset. Landlords with mortgage interest deductions on their property (allowable under Section 16(1) of the IRO for rental properties) should model whether personal assessment remains advantageous after accounting for the reduced property tax credit.

Rates Concession for Domestic Properties

The Budget also provides a rates concession for the first two quarters of 2025/26 (April to September 2025), capped at HKD 500 per quarter per tenement. This is a reduction from the full-year concessions granted in previous budgets. For a middle-class homeowner in a private estate with an annual rateable value of HKD 360,000, the quarterly rates bill is approximately HKD 3,600 (at the standard 5% rate). The HKD 500 cap means the concession covers roughly 14% of the first two quarters’ liability.

The concession is applied automatically to rates bills, requiring no action from the property owner. However, for landlords who pass rates on to tenants under their tenancy agreements, the concession effectively reduces the tenant’s outgoings, not the landlord’s. Landlords should review their tenancy agreements to confirm whether rates are recoverable from tenants; if so, the concession benefits the tenant, and the landlord’s net rental income remains unchanged.

Profits Tax Relief for Small Business Owners and Self-Employed Professionals

The 100% Profits Tax Waiver

For the 2025/26 tax year, a 100% waiver of profits tax is proposed, capped at HKD 1,500 per business. This applies to all sole proprietorships, partnerships, and corporations subject to profits tax under Section 14 of the IRO. For a small business with an annual profits tax liability of HKD 10,000, the waiver reduces the bill to HKD 8,500.

The cap is applied per business, not per taxpayer. A self-employed professional operating through a sole proprietorship and also holding a separate partnership interest will receive only one HKD 1,500 cap across all business income, as the IRD aggregates all profits tax liabilities under the same taxpayer for the purpose of this concession.

Two-Tiered Profits Tax Rates Remain Unchanged

The Budget did not alter the two-tiered profits tax rates regime introduced in the 2018/19 tax year. For the 2025/26 tax year, the first HKD 2 million of assessable profits continues to be taxed at 8.25% for corporations and 7.5% for unincorporated businesses, with profits exceeding HKD 2 million taxed at the standard 16.5% and 15% rates respectively.

This regime remains a significant advantage for small business owners. A sole proprietor with assessable profits of HKD 1.8 million would pay: (HKD 1.8 million × 7.5%) = HKD 135,000, compared to HKD 270,000 under the standard rate (HKD 1.8 million × 15%). The HKD 1,500 profits tax waiver further reduces the liability to HKD 133,500.

Actionable Consideration for Sole Proprietors

Sole proprietors should note that the two-tiered rate applies only to one nominated business per taxpayer. If an individual operates multiple sole proprietorships, only one can benefit from the reduced rate on the first HKD 2 million of profits; the others are taxed at the standard rate from the first dollar. The IRD’s Departmental Interpretation and Practice Notes No. 44 (revised 2024) clarifies that the taxpayer must nominate the business for the concession in the tax return.

For professionals who operate through a limited company (e.g., a single-director consulting firm), the corporate two-tiered rate applies, and the company is a separate legal entity. However, the IRD may challenge arrangements where multiple related companies are used to multiply the HKD 2 million threshold, under the anti-avoidance provisions of Section 61A of the IRO. The Budget did not introduce new anti-avoidance measures, but the IRD’s increasing scrutiny of such structures—as noted in its 2024/25 annual report—suggests caution.

MPF and Retirement Planning Considerations

No Change to MPF Contribution Rates or Caps

The Budget did not announce any changes to the Mandatory Provident Fund (MPF) contribution rates (5% each from employee and employer, capped at HKD 1,500 per month per side) or the maximum relevant income level (HKD 30,000 per month, as of 2025). This is notable given the government’s ongoing consultation on MPF reform, including proposals to increase the contribution cap and to allow earlier access to funds for home purchase.

For middle-class employees earning above HKD 30,000 per month, the HKD 1,500 monthly employer contribution remains a fixed cost. The tax-deductible voluntary contribution (TVC) limit of HKD 60,000 per year under Section 26G of the IRO also remains unchanged. A taxpayer earning HKD 600,000 per year who makes the maximum TVC of HKD 60,000 would reduce their salaries tax liability by approximately HKD 10,200 (at an average rate of 17%), assuming the contribution is made before the end of the tax year.

Actionable Step: Maximize TVC Before Year-End

The 2025/26 tax year runs from 1 April 2025 to 31 March 2026. Taxpayers intending to claim the TVC deduction must make the contribution by 31 March 2026. Given the Budget’s reduction in the salaries tax waiver cap, maximizing the TVC deduction becomes a more important tool for tax planning. For a taxpayer in the 17% marginal bracket, each HKD 10,000 of TVC saves HKD 1,700 in tax—more than the entire salaries tax waiver.

Summary of Actionable Takeaways

1. File your 2025/26 tax return accurately and on time (by early May 2026 for paper returns, early June 2026 for e-filing) to claim the HKD 1,500 salaries tax waiver and the property tax waiver; these are automatic but require a valid return to be processed.
2. For high earners with net chargeable income approaching HKD 5 million, model your tax under both the progressive rates and the new two-tiered standard rate; consider deferring discretionary bonuses or accelerating deductible expenses (e.g., MPF TVC, charitable donations) into the 2025/26 tax year to stay below the threshold.
3. Sole proprietors and small business owners should nominate their highest-profit business for the two-tiered profits tax rate by completing the relevant box in the 2025/26 profits tax return; the HKD 1,500 profits tax waiver will be applied automatically.
4. Landlords with mortgage interest on rental properties should review whether personal assessment remains beneficial after the property tax waiver reduces the available credit; the IRD’s eTax portal allows you to run a preliminary calculation without filing.
5. Maximize your MPF TVC of HKD 60,000 before 31 March 2026 to reduce your salaries tax liability; this single action can save more tax than the entire Budget waiver package for most middle-class earners.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.