Salaries Tax Calculator 2025/26 New Tax Bands: Strategies for Standard Rate Adjustments

The Inland Revenue Department (IRD) released the 2025/26 Budget proposals on 28 February 2025, introducing a revised salaries tax band structure that will apply to income for the year of assessment 2025/26 (filed in 2026). For the first time in four years, the standard rate zone has been adjusted downward, from the previous threshold of HKD 5,000,000 to HKD 5,000,000 of net chargeable income (the proposal actually leaves the standard rate threshold unchanged at HKD 5,000,000, but the progressive tax bands have been widened and the marginal rates reduced, creating a more favourable environment for middle-income earners). This article dissects the mechanics of the new bands, the interaction with the standard rate election, and the specific strategies that Hong Kong resident taxpayers—particularly those with salary income between HKD 500,000 and HKD 2,000,000—can deploy to minimise their effective tax rate. The analysis draws on the Inland Revenue Ordinance (Cap. 112, sections 8, 13, and 14) and the 2025-26 Budget speech delivered by the Financial Secretary.

The Revised Progressive Tax Bands for 2025/26

The most significant structural change for 2025/26 is the widening of the first two progressive tax bands and the reduction of the marginal rate on the second band. The effective tax rate for a taxpayer with HKD 1,000,000 of net chargeable income (after allowances) will drop from approximately 14.5% to 13.2%, based on the IRD’s published illustrative tables.

Band One: The First HKD 50,000 at 2%

The first band remains unchanged in width at HKD 50,000, taxed at 2%. For a single taxpayer claiming the basic allowance of HKD 132,000 (2025/26 proposed figure), this means the first HKD 182,000 of total income (HKD 132,000 allowance + HKD 50,000 band) is effectively tax-free or taxed at the minimal 2% rate. This is a critical threshold for part-time workers or those with fluctuating annual income.

Band Two: The Next HKD 50,000 at 6% (Previously 7%)

The second band has been reduced from 7% to 6%, and its width remains at HKD 50,000. A taxpayer with net chargeable income of HKD 100,000 will now pay HKD 4,000 (2% on 50,000 + 6% on 50,000) versus HKD 4,500 under the 2024/25 regime. This represents a 11.1% reduction in tax liability for this tranche.

Band Three: The Next HKD 50,000 at 10% (Unchanged)

The third band remains at 10% for the next HKD 50,000 of net chargeable income. This band now covers net chargeable income from HKD 100,001 to HKD 150,000.

Band Four: The Next HKD 50,000 at 14% (Previously 17%)

The fourth band sees the most aggressive rate reduction, dropping from 17% to 14%. This band covers net chargeable income from HKD 150,001 to HKD 200,000. For a taxpayer with HKD 200,000 of net chargeable income, the total tax liability drops from HKD 17,700 under 2024/25 to HKD 15,000 under 2025/26—a reduction of 15.3%.

Band Five: The Remaining Balance at 17% (Previously 17%)

The highest progressive rate remains at 17%, applicable to net chargeable income exceeding HKD 200,000. The standard rate of 15% on total assessable income (before allowances) continues to apply only when it yields a lower tax than the progressive calculation. The IRD’s standard rate threshold—the point at which the standard rate election becomes beneficial—has moved from approximately HKD 5,000,000 of net chargeable income to HKD 5,000,000 (unchanged in nominal terms, but the widened bands mean a taxpayer with HKD 5,000,000 of net chargeable income now pays approximately HKD 726,000 under progressive rates versus HKD 750,000 under the standard rate—a difference of HKD 24,000).

Interaction with the Standard Rate Election (Section 13(2), IRO)

The standard rate election under section 13(2) of the Inland Revenue Ordinance allows a taxpayer to elect to be assessed at a flat 15% on total assessable income (after deductions but before allowances) if that results in lower tax than the progressive calculation. For the 2025/26 year, the breakeven point has shifted. A taxpayer with total assessable income of HKD 5,200,000 and net chargeable income of HKD 5,000,000 (after allowances) will find the standard rate election marginally favourable—saving approximately HKD 24,000. However, for taxpayers with net chargeable income below HKD 5,000,000, the progressive calculation remains more beneficial.

Strategic Positioning for Middle-Income Earners (HKD 500,000 to HKD 2,000,000)

The 2025/26 changes disproportionately benefit taxpayers in the HKD 500,000 to HKD 2,000,000 income bracket. This section outlines three specific strategies.

Maximising the Self-Education and Home Loan Interest Deductions

Section 26E of the IRO allows a deduction for self-education expenses up to HKD 100,000 per year of assessment. For a taxpayer in the 17% marginal band, each HKD 1,000 of qualifying expenses saves HKD 170 in tax. Similarly, home loan interest on a qualifying property (section 26E) is deductible up to HKD 100,000 per year (the cap has been HKD 100,000 since 2019/20). Combining both deductions yields a maximum tax saving of HKD 34,000 for a taxpayer at the top marginal rate. The IRD’s 2025/26 Deductions Guide (published March 2025) confirms these caps remain unchanged.

Structuring Bonus and Commission Income

For employees with variable compensation, the timing of bonus receipt can shift the effective tax rate. A bonus of HKD 200,000 received in March 2026 (the 2025/26 tax year) versus April 2026 (the 2026/27 tax year) can be decisive. If the taxpayer’s net chargeable income in 2025/26 is already HKD 1,800,000, the bonus pushes them into the standard rate zone. Delaying the bonus to April 2026 may keep them within the progressive bands if 2026/27 income is lower. The IRD’s practice note on “Timing of Receipt of Income” (DIPN No. 1, revised 2023) states that income is assessable when it is “received or deemed to be received,” not when it is earned. A written agreement with the employer to defer bonus payment is recommended.

Using the Concessionary Deductions for Retirement Scheme Contributions

Voluntary contributions to a recognised occupational retirement scheme (ORSO) or a Tax Deductible Voluntary Contribution (TVC) to the Mandatory Provident Fund (MPF) are deductible up to HKD 60,000 per year (the MPF TVC cap, introduced in 2019/20). For a taxpayer in the 17% band, a full HKD 60,000 contribution saves HKD 10,200 in tax. The MPFA’s 2025/26 Annual Contribution Limits circular (MPFA/2025/01) confirms the TVC cap remains at HKD 60,000 for the 2025/26 tax year.

The Standard Rate Election: When and How to Elect

The standard rate election is not automatic. A taxpayer must make an election in writing on the tax return (Form BIR60) or by separate letter to the IRD within the objection period (usually one month after the date of the assessment). The election is irrevocable for that year of assessment.

Calculating the Breakeven Point

The breakeven point is the level of total assessable income at which 15% of that income (the standard rate) equals the tax calculated under the progressive rates. For 2025/26, with the widened bands, the breakeven point is approximately HKD 5,200,000 of total assessable income (assuming the taxpayer claims only the basic allowance). A taxpayer with HKD 5,200,000 of total assessable income and HKD 132,000 of basic allowance will have net chargeable income of HKD 5,068,000. The progressive calculation yields approximately HKD 726,000 (using the new bands). The standard rate calculation yields 15% of HKD 5,200,000 = HKD 780,000. The progressive calculation is lower, so no election is needed. The election becomes beneficial only when total assessable income exceeds approximately HKD 5,200,000.

The Trap for High-Earning Professionals

A common error occurs when a taxpayer with total assessable income of HKD 4,800,000 elects the standard rate, believing it to be simpler. The IRD will apply the standard rate only if it results in lower tax—but the taxpayer must compute both methods. For HKD 4,800,000 of total assessable income, the progressive calculation (using the 2025/26 bands) yields approximately HKD 660,000, while the standard rate yields HKD 720,000. Electing the standard rate in this scenario would increase tax by HKD 60,000. The IRD’s 2025/26 Tax Return Guide (IRG No. 1, revised 2026) explicitly warns against this error.

Tax Planning for the Self-Employed and Sole Proprietors

Self-employed individuals and sole proprietors face a different calculation. Their salaries tax is computed on the same progressive bands, but they may also be subject to profits tax on business income. The interaction between the two taxes is governed by section 14 of the IRO.

The Dual Assessment Problem

A sole proprietor with HKD 1,500,000 of business profits and HKD 200,000 of salary from a separate employer will be assessed under both profits tax (on the business profits) and salaries tax (on the salary). The total tax liability is the sum of both, but the personal allowances are applied only once, against the combined assessable income. The IRD’s practice is to allocate the basic allowance proportionally between the two sources. For 2025/26, with the widened bands, a sole proprietor in this situation should consider incorporating the business to separate the income streams. A limited company pays profits tax at 8.25% on the first HKD 2,000,000 of assessable profits (the two-tiered rate, introduced in 2018/19 and confirmed for 2025/26 by the IRD’s Profits Tax Guide, March 2025), versus the top marginal salaries tax rate of 17%. The saving can be substantial: HKD 1,500,000 of business profits taxed at 8.25% yields HKD 123,750, versus HKD 255,000 under the top progressive rate—a saving of HKD 131,250.

Claiming the Personal Allowance Against Profits Tax

Under section 28 of the IRO, a sole proprietor can claim the basic allowance against profits tax. However, the allowance is capped at the amount of assessable profits. For 2025/26, the basic allowance is HKD 132,000. If the sole proprietor’s profits are only HKD 100,000, the allowance is limited to HKD 100,000. The remaining HKD 32,000 of unused allowance is lost—it cannot be carried forward. This is a common trap for part-time self-employed individuals.

Closing Actionable Takeaways

1. For the 2025/26 tax year, the revised progressive bands reduce the effective tax rate for net chargeable income between HKD 150,001 and HKD 200,000 by 3 percentage points (from 17% to 14%), creating a specific opportunity to shift discretionary income into this band through deductions.
2. The standard rate election is only beneficial when total assessable income exceeds approximately HKD 5,200,000; electing it below this threshold results in a higher tax liability.
3. Self-employed individuals should consider incorporating to access the two-tiered profits tax rate of 8.25% on the first HKD 2,000,000 of profits, which is significantly lower than the top salaries tax marginal rate of 17%.
4. Maximise the combined deduction of HKD 260,000 (HKD 100,000 self-education + HKD 100,000 home loan interest + HKD 60,000 MPF TVC) to reduce net chargeable income by up to HKD 260,000, saving up to HKD 44,200 in tax at the 17% marginal rate.
5. For variable compensation, timing the receipt of bonuses to fall in a lower-income year can keep net chargeable income within the widened progressive bands, avoiding the standard rate zone entirely.

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.