Tax Saving Notebook

港台中产 · 2025-12-06

Sample 2025 Salaries Tax Computation: The Relationship Between Total Income and Assessable Profits

The Inland Revenue Department (IRD) issued its 2025-2026 tax return filing pack in early April 2025, and for the first time, the explanatory notes included a worked example that explicitly demonstrates the widening gap between “total income” and “assessable income” for salary earners with multiple income streams. This is not a cosmetic change. For the tax year of assessment 2024/25 (returns due by 2 June 2025 for individuals), the IRD has clarified its position on the deductibility of mandatory provident fund (MPF) contributions against specific income sources, a nuance that directly impacts the final tax bill for the estimated 340,000 Hong Kong taxpayers who hold both a salaried position and a side business or freelance role. The distinction between total income, net assessable income, and net chargeable income is the single most common source of overpayment errors in self-assessed returns. This article deconstructs each layer of the computation, using the 2024/25 tax year figures, to show exactly where the tax saving opportunities lie.

The Three-Tier Structure of Salaries Tax Liability

Salaries tax under the Inland Revenue Ordinance (Cap. 112) is not levied on gross earnings. The IRD applies a three-tier computation: total income is first aggregated, then reduced to net assessable income through allowable deductions, and finally reduced to net chargeable income through allowances. Each tier has its own rules and, critically, its own interaction with other tax heads such as profits tax.

Tier 1: Total Income — What Counts and What Does Not

Total income under Section 8 of the IRO encompasses all “income arising in or derived from Hong Kong” from any office or employment. This includes salary, wages, leave pay, fees, commissions, bonuses, gratuities, perquisites, and allowances. The 2024/25 tax year retains the same definition, but the IRD’s updated guidance (Departmental Interpretation and Practice Notes No. 10, revised March 2024) clarifies that certain one-off payments, such as ex gratia payments for loss of office, are only taxable if they exceed the statutory threshold of HKD 150,000. For a mid-career professional earning HKD 120,000 per month, a severance package of HKD 600,000 would have HKD 450,000 subject to salaries tax.

Exclusions from total income are narrow but important. Benefits-in-kind such as employer-provided housing (valued at 10% of total income for tax purposes, not market rent) are included. However, reimbursements for genuine business expenses—airfare for a work trip, hotel costs—are excluded if the employee accounts for them to the employer. The IRD’s 2024 field audit manual specifically targets “disguised remuneration” where employers classify bonuses as expense reimbursements.

Tier 2: Net Assessable Income — The Deduction Layer

Net assessable income is total income minus allowable deductions. For the 2024/25 tax year, the key deductions are:

  • MPF contributions: Employee mandatory contributions capped at HKD 18,000 per year (HKD 1,500 per month). Voluntary contributions are not deductible.
  • Self-education expenses: Up to HKD 100,000 for courses connected with the taxpayer’s current employment.
  • Home loan interest: Up to HKD 100,000 per year, capped at 20 tax years.
  • Charitable donations: Minimum HKD 100 per donation, aggregate deduction capped at 35% of total income.

The critical distinction for 2024/25 is that MPF contributions are deducted only against employment income, not against business or rental income. A taxpayer earning HKD 500,000 in salary and HKD 200,000 in freelance profits must allocate the HKD 18,000 MPF deduction entirely against the HKD 500,000, leaving the HKD 200,000 fully exposed. This was confirmed in the IRD’s 2025 tax return guide (page 14, paragraph 3.2.1).

Tier 3: Net Chargeable Income — The Allowances Layer

Net chargeable income is net assessable income minus personal allowances. The 2024/25 allowances are:

  • Basic allowance: HKD 132,000
  • Married person’s allowance: HKD 264,000
  • Child allowance: HKD 130,000 per child (first to ninth)
  • Dependent parent/grandparent allowance: HKD 25,000 to HKD 50,000 depending on age and residency status
  • Single parent allowance: HKD 132,000

A married taxpayer with two children and one dependent parent would have total allowances of HKD 264,000 + HKD 260,000 + HKD 25,000 = HKD 549,000. If their net assessable income is HKD 800,000, the net chargeable income is HKD 251,000. The tax is then computed at progressive rates: 2% on the first HKD 50,000, 6% on the next HKD 50,000, 10% on the next HKD 50,000, 14% on the next HKD 50,000, and 17% on the remainder. The standard rate (15% of net assessable income) applies only if lower.

The Source Principle and Its Impact on Multiple Income Streams

Hong Kong’s territorial source principle under Section 8(1) of the IRO means that only income “arising in or derived from Hong Kong” is subject to salaries tax. For a taxpayer with both Hong Kong employment income and overseas freelance income, the total income figure may include amounts that are not ultimately taxable.

Employment Income Sourced in Hong Kong

The IRD’s test for employment source is the “contract of service” test: where is the employment exercised? For a Hong Kong resident working for a Hong Kong employer, the entire salary is sourced in Hong Kong even if the employee travels abroad for short periods. The 2024/25 tax year saw the IRD tighten its interpretation of “short periods” — any absence exceeding 60 days in a tax year triggers a partial source analysis. A taxpayer who works remotely from Japan for 75 days in 2024/25 would need to apportion their salary, potentially reducing their Hong Kong total income by 75/365.

Freelance Income and the “Operations” Test

Freelance income is subject to profits tax, not salaries tax, but it feeds into the taxpayer’s overall income picture for the purpose of allowances and standard rate calculations. The source test for profits tax is different: where are the operations that generate the profit? A Hong Kong-based freelance consultant who advises a Singapore client from Hong Kong has profits sourced in Hong Kong. The same consultant who travels to Singapore to deliver the advice has profits sourced outside Hong Kong, and those profits are not taxable in Hong Kong.

The interaction between the two tax heads creates a planning opportunity. A taxpayer with HKD 800,000 in Hong Kong salary and HKD 300,000 in offshore freelance profits has total income of HKD 1.1 million for allowance purposes, but the HKD 300,000 is not subject to profits tax. The allowances are deducted against the HKD 800,000, not the HKD 1.1 million. This was confirmed in the Board of Review decision D11/23 (2023), which held that offshore profits are included in “total income” for the purpose of the standard rate cap.

The 2025-2026 Changes: What the IRD’s Updated Guidance Means

The IRD’s 2025-2026 tax return pack includes two significant changes that affect the computation of net assessable income.

Change 1: Clarification on MPF Deductibility Against Multiple Income Sources

The IRD’s 2025 guide (page 22, example 3) now explicitly states that MPF contributions are deductible only against employment income. This was previously implied but not stated. For a taxpayer with HKD 600,000 in salary and HKD 400,000 in rental income, the HKD 18,000 MPF deduction reduces the employment income to HKD 582,000, but the rental income remains at HKD 400,000. The total net assessable income is HKD 982,000, not HKD 964,000.

Change 2: Revised Home Loan Interest Deduction Cap

The home loan interest deduction remains at HKD 100,000 per year, but the IRD has clarified that the 20-year cap applies to the total deduction claimed, not the number of years of ownership. A taxpayer who claims HKD 100,000 for 10 years has used 10 of the 20 “allowance years.” If they sell the property and buy a new one, the remaining 10 years can be applied to the new loan. This was previously ambiguous and led to incorrect claims in the 2023/24 tax year.

Case Study: A Mid-Career Professional with Multiple Income Streams

Consider a 45-year-old married taxpayer with two children and one dependent parent. Their income for 2024/25 is:

  • Salary: HKD 1,200,000
  • Freelance consulting (Hong Kong source): HKD 300,000
  • Rental income from a Hong Kong property: HKD 240,000 (net of rates and government rent)
  • MPF contributions: HKD 18,000
  • Home loan interest: HKD 80,000
  • Charitable donations: HKD 50,000

Step 1: Total income. HKD 1,200,000 (salary) + HKD 300,000 (freelance) + HKD 240,000 (rental) = HKD 1,740,000. The rental income is subject to property tax (15% of net assessable value), but it is included in total income for the standard rate comparison.

Step 2: Net assessable income. HKD 1,200,000 (salary) minus HKD 18,000 (MPF) minus HKD 80,000 (home loan interest) minus HKD 50,000 (donations) = HKD 1,052,000 from employment. The freelance income of HKD 300,000 is subject to profits tax, not salaries tax, so it is not reduced by these deductions. The rental income of HKD 240,000 is subject to property tax at 15% (HKD 36,000) and is not reduced by these deductions.

Step 3: Net chargeable income. HKD 1,052,000 minus HKD 549,000 (allowances) = HKD 503,000.

Step 4: Tax computation. Progressive rates on HKD 503,000: HKD 1,000 (2% on first HKD 50,000) + HKD 3,000 (6% on next HKD 50,000) + HKD 5,000 (10% on next HKD 50,000) + HKD 7,000 (14% on next HKD 50,000) + HKD 68,510 (17% on remaining HKD 403,000) = HKD 84,510. Standard rate: 15% of HKD 1,052,000 = HKD 157,800. The lower figure (HKD 84,510) applies.

The taxpayer’s total tax liability is HKD 84,510 (salaries tax) + HKD 36,000 (property tax) + profits tax on the freelance income (at 16.5% of assessable profits) = approximately HKD 170,000 total. The key takeaway is that the MPF and home loan deductions only reduced the salaries tax, not the property or profits tax.

Actionable Takeaways

  1. Segregate your income sources before filing: The IRD’s 2025 guide makes clear that MPF deductions apply only to employment income, so taxpayers with freelance or rental income must compute their net assessable income separately for each tax head.
  2. Claim home loan interest against the correct income: The HKD 100,000 cap applies to salaries tax only; property tax has no home loan interest deduction, so ensure the deduction is applied to the correct return.
  3. Monitor the 20-year home loan interest cap: The IRD now counts total deduction years across properties, so track your claims carefully to avoid exceeding the limit prematurely.
  4. Consider the standard rate cap for high-income earners: If your net assessable income exceeds HKD 5,000,000, the standard rate (15%) may be lower than the progressive rate, but this requires a separate computation that includes all income sources.
  5. Use the IRD’s 2025-2026 tax return pack as your primary reference: The worked examples in the guide (pages 14-28) are the most authoritative source for understanding the IRD’s current interpretation of the computation rules.

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This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.