3 Tips for Self-Employed Tax Reduction in Hong Kong
10 minute read
If you are self-employed in Hong Kong, it is important to understand the tax system and to file your tax returns on time. Hong Kong’s Inland Revenue Department (IRD) offers several tax breaks and grants for the self-employed.
We’ll talk about the strategies for self-employed taxes reduction in this article. But before that, you need to understand the tax system in Hong Kong.
Understanding the Tax System for Self-Employed in Hong Kong
Being self-employed in Hong Kong means that you’ll have to deal with something called “profits tax,” which is a tax on your income from your business or profession. It’s all about how much money you make and how much you get to keep.
Hong Kong uses a two-tiered profits tax rates system. The first tier comes with a friendly flat rate of 8.25% for profits up to HKD 2 million. Not too shabby, right? And for the second tier, which applies to profits over HKD 2 million, the tax rate gradually increases, landing somewhere between 14% to 17%. It all depends on how much profit you’re making.
Here’s a little example to make things crystal clear: Imagine your business earns HKD 2.5 million in profits during a year. The first HKD 2 million will enjoy the cosy 8.25% tax rate, and only the remaining HKD 500,000 will face progressive rates of 14% to 17%. So you see, it’s like a friendly little reward system for your success.
The basis period for profits tax is 12 months, ending on 31st March. However, in certain circumstances, the Inland Revenue Department (IRD) may allow a different basis period. You’ll need to file your tax return each year with the IRD. But don’t sweat it too much! Just make sure to get it done within 4 months after the end of the basis period.
Tax Obligations and Filing Requirements for Self-Employed
Self-employed individuals are responsible for fulfilling important tax obligations and meeting filing requirements. These key responsibilities include:
- Calculating and paying profits tax.
- Filing an annual tax return with the IRD.
- Paying estimated tax instalments throughout the year.
- Keeping accurate records of all business income and expenses.
- Claiming all allowable deductions.
Self-employed individuals who fail to comply with their tax obligations may be subject to penalties, including fines and interest.
All too much? Leave your tax worries to Sleek’s expert accountants
Common Tax Filing Mistakes Individuals Make
Here are some of the common tax filing mistakes you should avoid:
- Not filing a tax return: This is the most common tax filing mistake made by self-employed businesses. If you fail to file a tax return, you could be liable for penalties and interest.
- Not declaring all of your income: You are required to declare all of your income, including business profits, personal income, and any other sources of income. If you fail to declare all of your income, again you could be held liable for penalties and interest.
- Claiming incorrect deductions: You can only claim deductions for expenses that are directly related to your business. If you claim incorrect deductions, you will attract penalties and interest.
- Not paying your taxes on time: You are required to pay your taxes by the due date. If you fail to pay your taxes on time, you could be penalised.
Here, to avoid such mistakes, you should have a proper strategy in place. Now, if you wonder how to reduce self-employment tax in Hong Kong, here are the top three tips.
Self-Employed Taxes Reduction Strategies
Now, that you’ve understood the tax system for self-employed in Hong Kong, let’s take you through the strategies that will help you save on taxes.
1. Structure Income and Expenses to Minimise Tax Liability
Some people mistakenly believe that basic accounting is enough for their business to file taxes. However, this is not true.
Self-employed professionals are required to submit their accounting statements and audit reports to the government every year. So, basic accounting is not sufficient. Without proper accounting records, it’s difficult to create an effective tax strategy because the reporting might be inaccurate.
Having structured accounts and financial reports is not only important for audits but it also helps you find opportunities to save taxes.
Here is how self-employed professionals can structure their income and expenses to save taxes:
- Claim all allowable deductions: Self-employed individuals are allowed to claim several deductions from their assessable profits, including expenses incurred in the course of carrying on the business, such as rent, salaries, and business travel expenses. It is important to keep accurate records of all business income and expenses to claim all allowable deductions.
- Consider setting up a company: Setting up a company can help to reduce tax liability in several ways. For example, companies are taxed at a lower rate than individuals, and they can also claim certain deductions that are not available to individuals.
- Plan Ahead: It is important to plan when structuring your income and expenses to minimise tax liability. For example, you may want to consider timing your income and expenses to coincide with different tax years.
Plan Your Taxes with Sleek Today – Talk to Our Experts!
2. Make Use of Tax Reliefs and Allowances
The IRD offers many tax reliefs and allowances that are available to self-employed individuals. Here are some:
- One-off reduction of profits tax, salaries tax and tax under personal assessment for the year of assessment 2022/23: This is a one-off tax reduction of 100%, subject to a ceiling of HK$6,000 per case. This relief is applicable to both self-employed individuals and businesses.
- Tax deduction for domestic rent: Self-employed individuals and businesses can deduct the rent they pay for their business premises from their taxable profits. The maximum deduction is HK$100,000 per year.
- Tax exemption for certain business expenses: Self-employed individuals and businesses can claim tax exemption for certain business expenses, such as the cost of acquiring business assets, the cost of hiring employees, and the cost of advertising. However, the maximum tax exemption limit for self-employed in Hong Kong is HKD 100,000. This means that you can deduct up to HKD 100,000 from your assessable income when calculating your tax liability.
- Grants for start-up businesses: The IRD offers a number of grants to help start-up businesses, such as the Business Start-up Scheme and the Innovation and Technology Start-up Scheme. For example, the Business start-up scheme provides a one-off grant of HKD 50,000 to eligible start-up businesses. The grant can be used to cover a range of expenses, such as rent, salaries, and marketing.
You can find more information on tax reliefs and grants on the IRD website.
3. Invest in Tax-Efficient Options
Here are a few of the tax-efficient investment options available to self-employed individuals in Hong Kong:
- Individual Savings Accounts (ISAs): ISAs are a type of tax-efficient savings account that allows you to invest in a wide range of assets, including stocks, bonds, and mutual funds. There are two types of ISAs in Hong Kong: the Capital Guaranteed ISA (CISA) and the Stock Linked ISA (SISA). CISAs offer a guaranteed return, while SISAs offer the potential for higher returns.
- Tax-Deductible Pension Schemes: Self-employed individuals can contribute to a tax-deductible pension scheme, which can help to reduce their taxable income. There are several different pension schemes available in Hong Kong, so it is important to choose one that is right for you.
- Life Insurance: Life insurance can be a tax-efficient way to invest your money, as the premiums you pay are tax-deductible. You can also use life insurance to create a tax-free death benefit for your loved ones.
- Venture Capital Funds: Venture capital funds invest in early-stage businesses, which can offer the potential for high returns. However, venture capital funds are also high-risk investments, so it is important to do your research before investing.
- Property: Property can be a tax-efficient investment, as the capital gains on property are not taxed in Hong Kong. However, it is important to note that property can be an illiquid investment, so it is important to consider your investment goals before investing in property.
Plan Your Taxes with Sleek Today – Talk to Our Experts!
Leveraging Hong Kong’s Double Taxation Agreements
The Double Taxation Agreement (DTA) is a tax treaty between two countries that aims to prevent double taxation of income. Double taxation occurs when a person or company is taxed on the same income in two different countries.
DTAs typically do this by allocating taxing rights between the two countries. For example, a DTA might specify that a country can only tax income from employment if the work was performed in that country.
Currently, Hong Kong has 40 DTAs in force with countries around the world including China, US, and UK. These agreements cover a wide range of income, including employment income, business income, investment income, and capital gains.
There are several benefits to having a DTA with another country. These benefits include:
- Preventing double taxation: As mentioned above, DTAs help to prevent double taxation by allocating taxing rights between the two countries. This means that a self-employed individual will only be taxed on their income once, in the country where it is earned.
- Reducing withholding taxes: DTAs can also reduce withholding taxes on certain types of income, such as dividends and interest. This can save you money on your taxes.
- Facilitating cross-border trade and investment: DTAs can make it easier to trade and invest across borders. This is because they provide certainty about the tax treatment of cross-border transactions.
Compliance and Record-Keeping
Accurate record-keeping is crucial for self-employed individuals for several reasons:
- Tax Optimisation: Keeping accurate records allows self-employed individuals to optimise their taxes by ensuring they claim all eligible deductions and credits.
- Audit Protection: Accurate records act as protection during audits, reducing the risk of penalties from tax authorities.
- Business Planning: Maintaining accurate records helps self-employed individuals track their income and expenses, facilitating effective business planning.
- Creditworthiness: Accurate records improve creditworthiness, making it easier to secure loans or credit cards.
Here are some tips to maintain organised financial records for self-employed individuals:
- Establish a System: Set up a system, such as a filing system, spreadsheet, or cloud-based accounting software, to organise your records effectively.
- Retain All Documents: Keep all business-related documents, including invoices, receipts, bank statements, and tax returns.
- Categorise Expenses: Categorise your expenses to easily track income and expenses.
- Regular Updates: Keep your records up-to-date by updating them regularly.
- Back-Up Records: Create backups of your records to protect against data loss.
Seeking Professional Advice to Save Taxes?
Consulting with tax experts or accountants can greatly benefit self-employed professionals in Hong Kong.
These experts possess specialised knowledge of the complex tax laws and regulations in the region, ensuring accurate tax compliance and maximising deductions and credits.
Working with professionals like Sleek can provide further advantages, including personalised tax advice tailored to individual circumstances, streamlined tax compliance processes, and proactive tax planning strategies.
These services help self-employed professionals effectively manage their taxes and focus on their core business activities with confidence.
FAQs
Self-employed businesses in Hong Kong refer to individuals who operate their own business or provide services as a sole proprietor, rather than being employed by a company or organization.
In Hong Kong, the term “freelancers” is often used interchangeably with self-employed individuals. Both refer to individuals who work for themselves and are not employed by a company. Therefore, there is no significant difference between the two in the context of Hong Kong.
Here are some tips for self-employed tax reduction in Hong Kong:
- Structure Income and Expenses to Minimise Tax Liability
- Make Use of Tax Reliefs and Allowances
- Invest in Tax-Efficient Options
