What Is Payroll Deduction in Hong Kong?
Payroll deduction in Hong Kong is the part of an employee’s total pay that gets held back to meet legal duties, tax needs, and agreed perks. These cuts make sure businesses follow Hong Kong’s work laws while letting employees’ chip in for retirement, taxes, and personal promises.
For employers, getting payroll deductions right is a must by law. For employees, it changes how much they take home and shapes their long-term money plans.
Why Payroll Deduction Matters for Employers and Employees
Payroll deduction isn’t just about crunching numbers. In Hong Kong’s rule-heavy work world, it has a big impact on:
- Making sure companies follow the Employment Ordinance and MPF rules
- Avoiding fines from the Inland Revenue Department (IRD)
- Keeping employees’ trust by showing clear pay calculations
- Helping with retirement savings and tax duties
Poor handling of payroll deductions can lead to fines, arguments, checks, and damage to a company’s name.
Types of Payroll Deductions in Hong Kong
Statutory Payroll Deductions
The law in Hong Kong requires employers to apply statutory deductions.
Common statutory deductions include:
- Mandatory Provident Fund (MPF) payments
- Salaries tax (reported to IRD paid once a year by employees)
- Court-ordered deductions (if needed)
Not taking out or reporting these can result in legal action or money penalties.
Voluntary Payroll Deductions
Voluntary deductions are optional and need clear employee agreement to happen.
Some examples are:
- Premiums for medical, life, or dental insurance
- Fees for union membership
- Payments for loans the employee okayed
All voluntary deductions must have paperwork, be clear, and allow cancellation as agreed.
Laws That Control Payroll Deduction in Hong Kong
Several government bodies and rules manage payroll deductions such as:
- Employment Ordinance (Cap. 57)
- Mandatory Provident Fund Schemes Ordinance (MPFSO)
- Occupational Retirement Schemes Ordinance (ORSO)
- Inland Revenue Department (IRD)
The law requires employers to keep accurate payroll records for at least 7 years and to make sure deductions stay within legal limits.
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Components of Payroll Deduction in Hong Kong
Mandatory Provident Fund (MPF) Contributions
MPF stands out as the biggest payroll deduction in Hong Kong.
Current MPF rules (2025–2026):
- Contribution rate: 5% from employer + 5% from employee
- Relevant income threshold: HKD 7,100 per month
- Contribution cap: HKD 1,500 per month per party
The cap limits additional MPF contributions.
Salaries Tax
Hong Kong uses a territorial and annual tax system.
Key points to remember:
- Employers report income using IR56 forms
- Employees pay salaries tax yearly
- Tax calculation uses either progressive rates or the standard rate, whichever results in a lower amount
Employers don’t withhold tax but must report income.
To know more refer on the payroll compliance guide in Hong Kong and automate now.
Common Voluntary Deductions
Insurance Premiums
Employees can choose to have insurance premiums taken out of their pay. They must give written permission, and the company needs to keep these records.
Loan Repayments and Union Fees
When employees pay back loans or pay union fees through their paycheck, it should follow the agreed plan. These items should show up on their pay stubs.
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How to Figure Out Payroll Deduction in Hong Kong (Step-by-Step)
Step 1: Find Out Gross Salary
Gross salary includes:
- Basic monthly pay
- Set allowances
- Bonuses (if they apply)
Example: Monthly pay = HKD 25,000
Step 2: Work Out MPF Contribution
Employee MPF contribution = 5% × HKD 25,000 = HKD 1,250 each month
(Within the HKD 1,500 limit)
Yearly MPF deduction = HKD 1,250 × 12 = HKD 15,000
Step 3: Figure Out Net Total Income
Yearly gross income = HKD 25,000 × 12 = HKD 300,000
Minus MPF contribution = HKD 300,000 – HKD 15,000 = HKD 285,000
Step 4: Use Personal Allowance
Basic personal allowance (single person): HKD 132,000
Net chargeable income =
HKD 285,000 – HKD 132,000 = HKD 153,000
Step 5: Figure Out Salaries Tax
Method 1: Progressive Tax Rates
| Income Band | Rate | Tax |
| First HKD 50,000 | 2% | HKD 1,000 |
| Next HKD 50,000 | 6% | HKD 3,000 |
| Next HKD 50,000 | 10% | HKD 5,000 |
| Remaining HKD 3,000 | 14% | HKD 420 |
| Total | HKD 9,420 |
Method 2: Standard Rate
15% × HKD 285,000 = HKD 42,750
Tax payable = lower amount = HKD 9,420
Step 6: Final Take-Home Pay
| Description | Amount (HKD) |
| Annual Gross Income | 300,000 |
| Less MPF | (15,000) |
| Less Salaries Tax | (9,420) |
| Final Annual Take-Home | 275,580 |
Ways to Ensure Correct Payroll Deductions in Hong Kong
- Pick payroll software that updates MPF and tax thresholds
- Check IRD and MPFA updates every year
- Show deductions on pay stubs
- Store employee authorizations
- Do regular payroll checks
Payroll Deduction Mistakes You Should Avoid
- Using old MPF thresholds
- Taking voluntary deductions without written agreement
- Wrong tax calculations
- Bad record-keeping
- Missing IR56 filing due dates
These errors can lead to fines, employee disputes, and audit problems.
To wrap up
Hong Kong payroll deductions need to be right, clear, and follow the rules. When employers and employees know about types of deductions use the right rates, and keep good records, they stay out of money and legal trouble.
New payroll systems and keeping up with rule changes make handling pay easier, safer, and faster.
Got doubts about payroll deductions or compliance?
Talk to our payroll experts now and make sure your payroll process follows all the rules and doesn’t cause you stress.
Frequently Asked Questions:
What does payroll deduction mean in Hong Kong?
Payroll deduction involves taking required and optional amounts from an employee’s pay to meet legal duties and agreed perks.
Do all employees have to join MPF?
Yes, MPF applies to employees aged 18–64 who earn HKD 7,100 or more each month, unless they’re exempt.
Do employers take out salaries tax every month?
No. Employers tell IRD about income, but employees pay salaries tax once a year.
Can employers take insurance premiums out of salary?
Yes, but they need written okay from employees and the right paperwork.
How long do Hong Kong employers need to keep pay records?
Employers must keep pay and deduction records for at least 7 years.
