Hong Kong is an attractive destination for foreign investment due to its low and competitive tax system, free market economy, dynamic development opportunities, world-class infrastructure, and various government incentives. The country was ranked as the world’s 2nd freest economy in the 2020 Index of Economic Freedom by The Heritage Foundation.
Companies aiming to establish a presence in Hong Kong can benefit from its low tax regime, easily obtained business licenses, straightforward company registration, and corruption-free government. It is essential to comply with local rules and regulations specified by the Hong Kong government. Additionally, understanding income tax, corporate tax laws, and social security is crucial for smooth company operations.
A good grasp of the onboarding process, including the Hong Kong payroll system, is essential for attracting, hiring, and retaining top talent. Familiarity with payroll tax in Hong Kong and labour requirements ensures accurate and compliant payroll management. The following guide covers all aspects of payroll in Hong Kong.
How Is Payroll Calculated in Hong Kong?
Payroll represents the total compensation an employer provides employees for their services over a specified period. Hong Kong’s payroll policies and procedures involve factors such as payment disbursement and tracking employees’ working hours.
To ensure accurate payroll calculation, it is crucial to maintain regular records. Social security contributions and other deductions must be withdrawn according to Hong Kong’s payroll rules and regulations.
Key Elements of Salary Structure in Hong Kong
The following elements form the salary structure in Hong Kong:
Cost to Company (CTC): This annual amount represents what a company owes when hiring an employee, including net remuneration, supplementary benefits, gross remuneration, and payroll deductions.
Gross Salary: The amount of salary before any deductions, encompassing components such as health insurance and social security contributions.
Net Salary: The amount remaining after all deductions have been made from the gross salary, credited to the employee’s bank account.
Basic Salary: The amount employees receive after all deductions and additions from the annual package, reflecting the employee’s job role and the employer’s business activities.
Allowances: These cover employment expenses that employers owe to employees. All employees, regardless of industry or employer, are entitled to allowances.
How to Set Up Payroll in Hong Kong
To set up payroll in Hong Kong, follow these steps:
Gather Essential Employee Information: Collect personal details such as name, date of birth, postal address, bank statements, passports, and health insurance coverage.
Establish a Legal Entity: Set up a legal entity to process payroll in Hong Kong.
Select a Company Name: Obtain an Incorporation Form, the Company’s Articles of Association, notice to the Business Registration Office (IRBR1), and open a local bank account.
Register Your Business: Register with the Commercial Court and apply for a business ID.
Register for Tax and Social Security: Obtain a national tax number, register for the severance fund, labour and tax registration, the Labour Risks Administrator, and Family Compensation Fund.
Social Security Registration: Register your company and employees with the Social Security Allowance (SSA) Scheme.
Open a Bank Account: Open a Hong Kong bank account to facilitate payroll-related payments. You’ll need court and registration information, a business registration certificate, certificate of incorporation, articles of association, statistical number, proof of health insurance registry, etc.
Finalise Payroll Amount: Determine the final payroll amount for employees.
Approve Payroll Structure and Cycle: Finalise and approve the payroll structure and cycle for your company.
Step-by-Step Payroll Processing in Hong Kong
Pre-Payroll Stage
Business Profile: Register your business as a legal entity under the Business Registration Ordinance (Chapter 310, Laws of Hong Kong) and obtain a unique business number.
Statutory Components: Comply with statutory compensation laws and regulations regarding wage and leave entitlements.
Attendance Policy: Establish a policy to calculate overtime, attendance, permissions, etc.
Salary Components: Address factors influencing salary calculation, including deductions, allowances, payroll tax, and leave types.
Payment Schedule: Set a fixed payment schedule to avoid delays and keep employees informed about payment dates.
Employee Details: Collect and enter all employees’ professional and personal details into the payroll system.
Payroll Calculation Stage
Enter data from the pre-payroll stage into the payroll system. Track working hours, calculate deductions and taxes, compute net salaries, and generate payslips. Ensure the payroll process is error-free, using either a traditional or automated method for record-keeping.
Post-Payroll Stage
Statutory Compliance: Adhere to statutory requirements, including deductions for EPF, TDS, ESI, etc., and ensure these are funded by the appropriate government agencies.
Payroll Accounting: Track payments and payroll-related expenditures to meet reporting and compliance requirements.
Payroll Reporting and Compliance: Prepare and submit mandatory compliance and reporting forms to local regulatory authorities, detailing all contributions, compensation, withholdings, and other required information.
Payroll Contributions
Employer Contribution: 5% to the Mandatory Provident Fund (MPF) for taxable income up to HKD 30,000, with a maximum of HKD 1,500. For earnings above HKD 30,000, the contribution varies.
Employee Contribution: 5% to the MPF for taxable income ranging from HKD 7,100 up to HKD 30,000, with a maximum of HKD 1,500. For earnings above HKD 30,000, the contribution varies.
Employee Income Tax Rates
Annual Tax Base | Tax Rates |
Up to HKD 50,000 | 2% |
HKD 50,001 – HKD 100,000 | 6% |
HKD 100,001 – HKD 150,000 | 10% |
HKD 150,001 – HKD 200,000 | 14% |
HKD 200,001 and above | 17% |
Payroll Cycle
The standard payroll cycle in Hong Kong is monthly, with payments released on the last working day of the month. If payment is delayed, a grace period of 7 days is allowed before additional interest must be paid.
Hong Kong Payroll Options for Companies
Employers can choose from several options for processing payroll in Hong Kong:
Internal Payroll: Larger companies with a long-term commitment to Hong Kong may handle payroll internally. They need to complete incorporation, register the business, and hire skilled staff. An experienced HR professional should manage payroll compliance.
Remote Payroll: Combining an HR payroll provider with remote payroll can simplify the process, with the provider handling employee payments.
Hong Kong Payroll Processing Company: Select a reliable payroll processing company familiar with local payroll rules and regulations.
Hong Kong Payroll Outsourcing: Partner with a global PEO service provider like Woodburn, which manages all aspects of the Hong Kong payroll process and ensures compliance with local requirements.
Entitlement and Termination Terms
Entitlement Terms in Hong Kong
Paid Time Off: Employees with at least three months of service are entitled to 7 days of paid leave per year, increasing by one day for each additional year of employment up to 14 days in the 9th year.
Sick Leave: Employees receive compensation for up to two days of sick leave per month in the first year, increasing to four days per month after one year of service. Sick leave is paid at 80% of average daily earnings.
Maternity Leave: Female employees are entitled to 14 weeks of paid maternity leave, which can extend to 18 weeks for complicated or multiple births. Maternity payment is based on four-fifths of average daily wages, up to HKD 80,000, with reimbursement from the government.
Paternity Leave: Employees are entitled to 5 days of paid paternity leave if employed under a contract for at least 40 weeks. Payment is at 80% of average daily earnings.
Public Holidays: Employees receive 17 public holidays annually.
Termination Terms in Hong Kong
Termination processes must comply with Labour Law, except in cases where an employer can prove fair cause for dismissal without notice. Typically, a 30-day written notice is required, though longer notice periods can be stipulated in the employment contract. Immediate termination without notice is possible under specific circumstances such as gross misconduct. Employees cannot be dismissed for reasons including paid sick leave, maternity protection, or trade union activities.
Hong Kong Payroll Processing Company
To ensure timely, accurate, and compliant payroll management in Hong Kong, foreign investors should understand local reporting, tax, and employment requirements. They can use services from a global PEO company like Woodburn to optimise compliance with Hong Kong payroll regulations.
How Can Woodburn Help with Global Payroll?
Hong Kong’s payroll management involves various factors, from payroll cycles to entitlement and termination terms. Companies may opt to use a global EOR platform like Woodburn to streamline the payroll process. Woodburn provides comprehensive EOR solutions, handling payroll processing and other relevant tasks, offering one-click payroll for global teams with payments made in local currencies.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.
Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.
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