⚠ Ex-Gratia Payments Above Statutory Amounts ARE Taxable
The statutory severance payment under the Employment Ordinance is not assessable to salaries tax. However, any ex-gratia payment above the statutory amount — including "golden handshake" payments, retention bonuses, and notice-in-lieu — may be fully or partially taxable depending on how they are structured and characterised.
Common Challenges
Taxable vs Non-Taxable Components
Severance packages often mix statutory (non-taxable) and contractual (potentially taxable) elements. Incorrect classification leads to either over-reporting or IRD assessment.
⚠ Risk: Declaring too much → overpaying tax on exempt amounts
MPF Offset Interaction
Employer MPF contributions offset against severance pay affect the net statutory amount — and therefore the tax-exempt figure. The calculation is complex and error-prone.
⚠ Risk: Incorrect MPF offset calculation → wrong tax-free amount
Notice Pay & Garden Leave
Payment in lieu of notice is treated differently from garden leave salary continuation for tax purposes. The characterisation affects the assessment year in which income is taxed.
⚠ Risk: Wrong year assessment → interest on underpaid provisional tax
Termination While Partly Offshore
If you worked partly outside HK during your employment, your final termination payment may be apportionable — reducing the HK-taxable amount.
⚠ Risk: No apportionment claim → overpaying tax on offshore portion
Who Is This For?
Employees being made redundant
Workers receiving statutory severance payments plus employer top-ups wanting to understand their tax position.
Executives receiving golden handshake packages
Senior staff with substantial ex-gratia or negotiated departure payments.
Staff on long-service payments
Employees with 5+ years of service receiving long service payments under the Employment Ordinance.
Expats being repatriated
Foreign nationals whose employment in HK is terminating, often with complex multi-component packages.
Employees in business restructurings
Staff affected by mergers, acquisitions, or divisional closures receiving termination packages.
What We Do
Termination Package Tax Analysis
We dissect your full termination package and determine the tax treatment of each component.
Statutory vs contractual vs ex-gratia vs benefits
MPF Offset Calculation
We calculate the correct MPF offset against your statutory severance/LSP and its impact on taxable amounts.
Based on actual MPF accrued benefits attributed to the employer
Employment Period Apportionment
For employees with offshore work history, we calculate the non-HK portion of terminal payments.
Using day-count apportionment across full employment period
Final Year Tax Return
We file your BIR60 for the final employment year, ensuring correct reporting of all termination payments.
Including timing of assessment year allocation
Tax Clearance Before Departure
For departing expats, we obtain tax clearance from the IRD before your departure from HK.
Employer IR56G/IR56F obligations also managed
How It Works
Package Review & Classification
1 dayWe review your termination letter and payment schedule, classifying each component for tax.
MPF & Apportionment Calculation
2 daysWe perform the MPF offset calculation and any offshore apportionment based on employment records.
Tax Position Paper
2–3 daysWe provide a written memo confirming the taxable and non-taxable amounts with supporting rationale.
Final Return Filing & Clearance
1–2 weeksWe file your final BIR60 and obtain tax clearance if you are leaving HK.
Case Studies
Mid-level manager made redundant after 8 years
- •Statutory severance HKD 312,000 (tax-free)
- •Ex-gratia top-up HKD 200,000
- •MPF offset correctly calculated at HKD 68,000
- •Taxable amount reduced from full package to HKD 200,000 only
“My employer's HR told me the whole package was taxable. TAX.hk correctly excluded the statutory portion.”
Regional Director — HK + Asia Pacific role
- •Total package HKD 1,800,000
- •45% HK service / 55% Asia Pacific over 12-year career
- •HK-taxable portion reduced to 45% of ex-gratia
- •Tax clearance obtained for departure within 4 weeks
“The employment period apportionment cut my taxable amount almost in half. Worth every cent of the advisory fee.”
Frequently Asked Questions
Is my statutory severance payment taxable?
No. Statutory severance payments made under s.31 of the Employment Ordinance are specifically excluded from the definition of "income from employment" under s.9(2A) of the IRO. The statutory amount (2/3 of monthly wages × years of service, capped at HKD 390,000) is tax-free.
My employer is paying me more than the statutory amount. Is the extra taxable?
Generally yes. Any ex-gratia payment above the statutory severance or long service payment is potentially assessable to salaries tax. However, if the excess payment is characterised as compensation for termination (rather than deferred salary), there may be arguments that part of it is not income from employment. We review the specific documentation.
I received 3 months' pay in lieu of notice. Is this taxable?
Yes. Payment in lieu of notice (PILON) is generally treated as assessable income from employment in the assessment year it is received. Unlike a statutory severance payment, PILON does not attract any specific exemption under the IRO.
How does the MPF offset work for severance pay?
Under the MPF Schemes Ordinance, employer mandatory contributions accrued in the employee's MPF account can be offset against statutory severance or long service payment. The offset amount reduces the net statutory payment, which in turn reduces the non-taxable exempt amount. Getting this calculation right is important.
I worked in HK and Singapore during my employment. Can I reduce the taxable portion?
Potentially yes. Where a terminal payment relates to an employment spanning both HK and overseas service, the IRD may accept an apportionment based on the proportion of HK service to total service. This can significantly reduce the HK-assessable amount of ex-gratia payments.
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