Did you know that the IRD permits eligible taxpayers to postpone part or all of their provisional tax payments under specific conditions?
Provisional tax involves making estimated tax payments throughout the year based on the previous year’s revenue.
It applicable to salaries tax (employment income) and profits tax (business net profits).
Eligible taxpayers can defer some or all provisional tax payments under certain conditions, aiding in managing cash flow during financial hardship or lower income expectations.
Holding over extends the time to pay existing tax liabilities, while tax relief reduces overall tax liability.
The Hong Kong tax system is very simple and attractive.
Still, it is important to understand it in order to make full use of it.
In this guide, we look at holding over provisional tax. The option of holding over provisional tax can offer relief during times of expected lower income or financial difficulty.
Let's explore what provisional tax is, when holding over might be beneficial, and how to do it smoothly.
What is Provisional Tax?
In Hong Kong, provisional tax is a system where you make estimated tax payments throughout the year as you earn income. Provisional tax is based on your revenue for the previous financial year.
This helps the Inland Revenue Department (IRD) collect taxes gradually instead of waiting for a large payment when you file your final tax return.
Normally, you are required to pay the Salaries Tax and Provisional Salaries Tax in two installments.
- The first installment is due by January, covering 75% of the provisional salaries tax for the year, paid after you have earned income for at least nine months.
- The second installment, covering the remaining 25%, is due by April.
In addition, this system ensures a steady flow of tax revenue for the government and helps taxpayers avoid a big tax bill at the end of the year.
Also, the IRD will impose penalties on taxpayers who fail to pay or underpay their provisional tax.
Who Needs to Pay Provisional Tax?
Provisional tax applies to two main types of taxes in Hong Kong: salaries tax and profits tax.
- Salaries Tax: This tax is on income from employment in Hong Kong, including salaries, wages, bonuses, commissions, and other job-related income. It is subject to provisional salaries tax payments.
- Profits Tax: This tax is on the net profits of businesses operating in Hong Kong and based on their Hong Kong revenue. It applies to sole proprietorships, partnerships, and limited companies.
Holding Over Provisional Tax
The IRD allows eligible taxpayers to defer some or all of their provisional tax payments under certain conditions.
This can help manage cash flow during financial hardship or if you expect your income to be much lower than the previous year.
For instance, if your business faces a temporary downturn, holding over provisional tax can offer financial relief.
Similarly, if you anticipate a significant drop in your salary due to a job change, you might be eligible to defer some of your provisional tax payments.
Difference Between Tax Holdover and Tax Relief / Tax Reduction
Holding over provisional tax is not the same as tax relief or tax reduction.
Tax relief reduces your overall tax liability, whereas holding over simply extends the time you have to pay the tax you already owe.
Eligibility for Holding Over Provisional Tax in Hong Kong
If we take the example of salary tax, IRD allows taxpayers to defer some or all of their provisional tax payments related to their salary tax assessment.
This assessment refers to the calculation of your tax liability for salaries tax purposes, based on your total salaries income, which may include income from employment, pensions, or director's fees, in Hong Kong.
The main criterion is your projected net chargeable income for the current provisional tax year of assessment. This is your taxable income after deducting allowable expenses and claiming any applicable tax allowances.
The tax year (year of assessment) for this purpose runs from 1 April to 31 March of the following year.
The 90% Rule
Generally, you must expect your net chargeable income for the current year to be at least 10% lower than your net income from the preceding year.
For example, if your net chargeable income for the 2023/2024 year of assessment was HKD 100,000, your estimated net income for the current year (2024/2025) should be less than 90% of HKD 100,000 (HKD 90,000) to qualify for holding over.
Again, the IRD may also consider exceptional circumstances beyond the 90% rule, such as business downturns, changes in employment, or unexpected expenses that significantly impact your ability to pay.
How to Apply for Holding Over of Provisional Tax
If you believe you meet the eligibility criteria, you can apply for holding over provisional tax by contacting the IRD or submitting a formal application form along with supporting documents that substantiate your claim of lower income.
These documents might include financial statements, salary reduction notices, or medical bills.
Holding Over Provisional Tax Application in Hong Kong
There are two ways to apply for holding over provisional tax in Hong Kong.
Paper Form
- Visit the Inland Revenue Department (IRD) website to download Form IR1121.
- Fill in sections with information about your income, estimated income for the current year, and the reason for requesting holdover.
- Send the completed form by mail or fax to the IRD.
eTAX (Electronic Processing)
- If you have an electronic tax account with the IRD, you can apply through their eTAX system.
- Submit your application online and receive instant confirmation.
Deadline for Holdover Application
Make sure to submit your application within the prescribed deadlines.
You can apply for holdover 28 days before the due date for payment or within 14 days after receiving the demand for payment.
Gather supporting documents to strengthen your application. This might include financial statements, salary reduction notices, or documents demonstrating unexpected expenses if applicable.
Final Words
Understanding how to hold over provisional tax can help you manage your finances in Hong Kong.
By delaying tax payments when your income is lower, you can improve cash flow and handle financial challenges more easily.
For expert accounting and tax advice, help with holding over provisional tax, or assistance with company registration, consider reaching out to Air Corporate.
