MPF is the abbreviation for the Mandatory Provident Fund Schemes, which is a compulsory retirement protection scheme for employers and employees in Hong Kong. The Hong Kong Government introduced the Mandatory Provident Fund Schemes Ordinance on August 3, 1995, and officially implemented the MPF system on December 1, 2000 (1).
The Hong Kong “Mandatory Provident Fund (MPF)” system is a compulsory retirement savings scheme established for working individuals aged 18 to 65. It aims to provide basic financial security for employees after retirement through monthly contributions (5% of monthly salary) from both employers and employees (2). The employer’s portion of MPF contributions is eligible for corporate tax deduction, while the employee’s MPF contributions can also be used for personal tax deduction.
MPF Contribution Mechanism
According to the regulations of the MPF system, if an employee’s monthly salary is HK$7,100 or above, both the employee and the employer must each contribute 5%, with a cap of HK$1,500. For those with a monthly income of less than HK$7,100, the employee is not required to contribute, but the employer must still make mandatory contributions for the employee. The funds are managed by fund management companies regulated by the Mandatory Provident Fund Schemes Authority (MPFA) for long-term investment to assist employees in saving for retirement.
It is worth noting that in the past, employers could use the accrued benefits derived from their contributions to the MPF to offset severance payments or long service payments required under the Employment Ordinance. This mechanism is commonly known as “offsetting.”
However, the government has officially abolished the MPF offsetting mechanism starting May 1, 2025 (3). Employees under continuous employment will no longer have their MPF accrued benefits reduced when receiving severance payments or long service payments.
Note! For the definition of a “continuous contract,” please refer to another article on the General Accounting blog: Hong Kong 468 Labor Legislation: A Comprehensive Guide for Employers and Employees on the Impact of Transitioning from “418” to “468”
Calculation Method for Long Service Payment
According to the Employment Ordinance, an employee employed under a continuous contract for not less than 5 years is eligible for a maximum long service payment of HK$390,000. The calculation formula depends on the mode of employment, with details as follows (4):
Monthly-rated employees:
Last month’s full salary X 2/3 X years of service
Daily-rated / Piece-rated employees:
The sum of wages for any 18 days chosen by the employee out of the last 30 normal working days, multiplied by the years of service.
Extended Reading: Filing Tax Returns for Employees
Why Abolish the MPF Offsetting Arrangement?
The purpose is to ensure that employees can receive their entitled severance payments or long service payments in full upon termination of employment, while also retaining their full MPF benefits (both employer and employee contribution portions). This prevents the accrued benefits from the employer’s contribution portion from being offset under the old system, thereby enhancing the level of retirement protection for employees.
From May 1, 2025, employers can no longer use the accrued benefits of employer MPF contributions to offset payments required for severance or termination of long service during that period. The abolition of MPF offsetting will be handled in stages, with details as follows:
Contributions before May 1, 2025: Accrued benefits from these contributions can still be used for offsetting.
Contributions after May 1, 2025: Cannot be used for offsetting (except for offsettable items such as employer voluntary contributions) and must be paid directly by the employer as severance payment/long service payment.
To assist employers in adapting to the new system and alleviate financial pressure, the government has also introduced a 25-year subsidy transition period (5) to provide financial support to employers in need.
In this subsidy arrangement, the government has established a mechanism called the “HK$500,000 threshold” as the basis for calculating the subsidy amount.
MPF Offsetting Abolition Government Subsidy: What is the HK$500,000 threshold?
In each subsidy year, the total expenditure of the post-transition portion of severance payments/long service payments for which an employer is eligible to apply for a subsidy is capped at a HK$500,000 threshold. Based on this threshold, the calculation and the government subsidy amount will vary.
Employer's share ratio and capped amount within the HK$500,000 threshold for the same subsidy year
| Year | Employer's Share Ratio | Capped Amount (whichever is lower) |
|---|---|---|
| Years 1-3 | 50% | HK$3,000 |
| Year 4 | 55% | HK$25,000 |
| Year 5 | 60% | HK$25,000 |
| Year 6 | 65% | HK$25,000 |
| Year 7 | 70% | HK$50,000 |
| Year 8 | 75% | HK$50,000 |
| Year 9 | 80% | HK$50,000 |
| Years 10-11 | 80% | N/A |
| Years 12-13 | 85% | N/A |
| Years 14-19 | 90% | N/A |
| Years 20-25 | 95% | N/A |
Employer's share ratio and capped amount beyond the HK$500,000 threshold for the same subsidy year
| Year | Employer's Share Ratio (No Cap) |
|---|---|
| Years 1-3 | 50% |
| Year 4 | 55% |
| Year 5 | 60% |
| Year 6 | 65% |
| Year 7 | 70% |
| Year 8 | 75% |
| Year 9 | 80% |
| Year 10 | 85% |
| Year 11 | 90% |
| Year 12 | 95% |
| Years 13-25 | 100% |
Source: https://www.offsettingsubsidy.gov.hk/en/scheme-characteristics.html#tab-1
To help employers clearly understand the subsidy calculation method and its actual impact, the following practical examples further illustrate the application of government subsidies.
Examples of Government Subsidies for the Abolition of MPF Offsetting
Example within the HK$500,000 threshold for the same subsidy year
For example, within the first 3 years after the abolition of MPF offsetting, if an employer needs to pay an employee HK$36,000 in severance/long service payments, the amount payable based on the 50% ratio would be HK$18,000. However, if the cap for that year is HK$3,000, the employer only needs to pay HK$3,000, and the balance of HK$33,000 will be subsidized by the government.
Note: The company’s tax-deductible amount is based on the actual compensation paid and does not include the government subsidy portion.
Extended Reading: Tax Filing Tutorial for Limited Companies
Government Subsidy for Abolition of MPF Offsetting: Example beyond the HK$500,000 threshold for the same subsidy year
Suppose after the abolition of MPF offsetting, an employer needs to pay HK$100,000 in long service payments. In the 5th year, the employer’s share would be HK$100,000 × 60% = HK$60,000. From the 13th year onwards, the government subsidy stops, and the employer must bear the excess amount in full.
Case spanning across the HK$500,000 threshold
If part of the amount in a case is within the HK$500,000 threshold and part exceeds HK$500,000, the total employer’s share is calculated by adding the results from the two sets of regulations mentioned above.
Example of a case spanning across the HK$500,000 threshold
For example, if the total severance payment is HK$40,000, of which HK$30,000 falls within the HK$500,000 threshold and HK$10,000 is the excess portion, the calculation is as follows:
- Portion within HK$500,000: Calculated based on the employer’s share ratio and capped amount table within the HK$500,000 threshold for the same year (e.g., 50% ratio), HK$30,000 × 50% = HK$15,000. However, if the cap is HK$2,250 (3,000 x 30,000/40,000), the employer actually pays HK$2,250.
- Excess portion: HK$10,000 × 50% = HK$5,000.
- Total: HK$2,250 + HK$5,000 = HK$7,250, with the government subsidizing the remaining portion.
As seen from the examples above, although the government provides a certain level of subsidy, the actual expenditure for employers after the abolition of offsetting will still increase.
Impact of Abolishing MPF Offsetting on Employers
The abolition of MPF offsetting means that companies can no longer use employer MPF contributions to pay for severance and long service payments. Therefore, the impact on employers is as follows:
Increased Cash Flow Pressure:
Employers must use company funds to pay for the portion of severance or long service payments after the abolition of MPF offsetting, increasing additional financial expenditure.
Fund Reservation and Budget Adjustment:
Large enterprises may need to set up provisions for long service payments or severance payments for employees, reserving funds based on employee salary and years of service, and adjusting internal management, administrative, and accounting processes.
Human Resources Risk Management:
After the abolition of MPF offsetting, companies need to re-evaluate decisions regarding layoffs or early dismissals to avoid increased human resources expenditure due to the loss of government subsidies.
Employer Tax Planning:
Employer contributions to MPF (mandatory) are tax-deductible. After the abolition of MPF offsetting, the long service payments or severance payments paid by employers are also tax-deductible. However, it should be noted that provisions set up for long service or severance payments are not tax-deductible.
Although employers may bear higher costs after the abolition of offsetting, from another perspective, this change represents a substantial improvement in protection for employees.
Impact of Abolishing MPF Offsetting for Long Service/Severance Payments on Employees
Enhancing Employee Retirement Protection
After the MPF reform, if an employee is unfortunately laid off or dismissed, the accrued benefits of employer contributions in the MPF will no longer be used for offsetting. Therefore, they can receive 100% of the MPF contributions upon retirement, enhancing employee retirement protection.
Employee Tax Planning
Severance payments or long service payments paid according to the Employment Ordinance are themselves non-taxable, but the following situations should be noted:
- If the amount paid by the employer exceeds the statutory amount, the excess portion may be regarded as additional compensation or a termination bonus and is subject to tax.
- Before May 1, 2025, employers could use the employer’s MPF contribution portion to offset severance or long service payments, but the remaining MPF benefits after offsetting are still non-taxable.
- After May 1, 2025, with the abolition of the offsetting mechanism, employers must pay severance or long service payments in full, but this does not affect the tax-exempt nature of the MPF itself.
Extended Reading: Key Dates for Salaries Tax Bills | Tutorial on Revision of Assessment
Frequently Asked Questions
How does the government subsidize the burden on businesses?
The government has launched a 25-year subsidy scheme, specifying the employer's share ratio and capped amounts for the post-transition portion in different years. There are limits on the employer's share during the first 9 years, and from the 10th year onwards, it is calculated according to a specified ratio, with the enterprise bearing the excess in full.
Is the MPF reform retroactive?
The reform is not retroactive, meaning that accrued benefits from contributions before the transition date (May 1, 2025) can still be used for offsetting, while the portion after the transition date is no longer applicable.
What is the impact of the abolition of MPF offsetting on employees under 18 and over 65?
Since MPF does not cover employees under 18 and over 65, the reform has no actual impact on them. However, employers must still pay the corresponding severance and long service payments according to labor laws. The government will not provide any subsidies for this.
Conclusion
Starting May 1, 2025, Hong Kong will officially implement the abolition of the MPF offsetting arrangement. In the future, employers can no longer use MPF contributions to offset severance or long service payments, which means an increased financial burden for employers, but a significant improvement in retirement protection for employees.
After the abolition of MPF offsetting for long service and severance payments, employees can receive the full employer portion of MPF contributions, and the employer’s statutory compensation amount is tax-exempt. The government has also launched a 25-year subsidy scheme to assist businesses in transitioning through the reform. This change marks an important upgrade to Hong Kong’s retirement protection system.
Further reading:
What is IR56M? How to fill out IR6036B? Step-by-step tutorial (with form download links)
Sources:
1. Background of the MPF System
https://www.mpfa.org.hk/en/mpf-system/background/why-mpf
2. What Newcomers to the Workforce Need to Know About Managing MPF
https://www.mpfa.org.hk/en/info-centre/press-releases/6390_record
3. Labour Department of the HKSAR Government – Abolition of MPF Offsetting Arrangement
https://www.op.labour.gov.hk/en/index.html
4. Labour Department – Long Service Payment
https://www.labour.gov.hk/eng/public/pdf/wcp/ConciseGuide/11.pdf
5. Labour Department Implements Subsidy Scheme for Abolition of MPF “Offsetting” Arrangement (Subsidy Scheme)
https://www.offsettingsubsidy.gov.hk/en/scheme-characteristics.html
