Every April and May, Hong Kong business owners and employees alike receive the green envelope from the Inland Revenue Department. For an SME owner there are two separate lines to deal with: the company files profits tax, and you personally file salaries tax. The rates, the process and the forms all differ, and confusing them means paying too much or missing a deadline.
This guide covers the filing process for both, the current rates and allowances (including the increases from 2026/27), the return types and block extension dates, and practical, lawful ways to reduce your bill. We also share two ideas rarely spelled out: two taxpayers, two streams and stacking allowances. Filing rests on the audit, and Stepcon joins audit and filing into one service.
In this article
- 1. The two taxes an owner faces
- 2. Profits tax rates and process
- 3. Deductions and allowances
- 4. Salaries tax rates
- 5. The 2026/27 allowance increases
- 6. Approved deductions
- 7. Return types and deadlines
- 8. What electronic filing actually covers
- 9. Provisional tax and objections
- 10. Late filing penalties
- Lawful ways to save
- Common filing mistakes
- FAQ
1. The two taxes an owner faces
A common blind spot: owners assume "filing" means the company's profits tax return. As a director and employee, you also face salaries tax personally. Hong Kong has three direct taxes — profits tax, salaries tax and property tax — charged on a territorial source basis: only income sourced in Hong Kong is taxable, and there is no VAT, sales tax, dividend tax or capital gains tax.
The difference
- Profits tax: charged on the company, on assessable profits from carrying on business in Hong Kong.
- Salaries tax: charged on an individual, on income from an employment or office in Hong Kong.
Our view: two taxpayers, two streams. A limited company is a separate legal person, and for tax purposes it and its owner are two entirely separate taxpayers. The company's profits go into the profits tax return; the salary and directors' fees the owner draws go into the salaries tax return. That separation is where an SME owner's tax planning starts — how you split company profit and personal salary bears directly on the overall bill. Note one key point: directors' remuneration is deductible for the company, while in the individual's hands it attracts allowances and lower progressive rates. That is where the planning room lies. Without seeing the two streams, there is nothing to plan.
2. Profits tax: rates and the filing process
Two-tiered profits tax rates
| Taxpayer | First HK$2 million of assessable profits | Balance above HK$2 million |
|---|---|---|
| Corporations (limited companies) | 8.25% | 16.5% |
| Unincorporated businesses (sole proprietorships, partnerships) | 7.5% | 15% |
Two restrictions many people do not know:
First, only one entity within a group of connected entities may elect the two-tiered rates. If one owner holds several Hong Kong companies, one must be nominated for the lower rate and the rest are charged at 16.5%.
Second, electing the two-tiered rates requires supplementary form S1, which must be filed electronically through the Business Tax Portal (BTP) or the Tax Representative Portal (TRP), for years of assessment 2020/21 to 2026/27. Without the S1, you do not get 8.25%.
The Government also announces a tax reduction in each Budget: the cap for 2025/26 is HK$3,000, deducted automatically on assessment with no application needed.
The profits tax filing process
- Complete the books: post a year of vouchers and produce a trial balance and financial statements.
- Complete the audit: obtain financial statements audited by an accountant holding a practising certificate.
- Make the tax adjustments: adjust accounting profit (adding back non-deductible expenses, deducting depreciation allowances, dealing with losses carried forward) to arrive at assessable profits.
- Complete the return: BIR51 for corporations and BIR52 for persons other than corporations, submitted with the audited statements and the tax computation.
- File supplementary forms: form S1 to elect the two-tiered rates, filed electronically.
- Follow up the assessment: check the notice of assessment when it arrives, and object within one month if you disagree.
Our view: most of your profits tax saving is decided before you file. The room to reduce profits tax is largely settled during the year in day-to-day operations and bookkeeping, not at the moment of filing. Whether each deductible expense voucher was kept and posted correctly determines the assessable profit. So rather than scrambling at filing time, keep the books properly through the year and record every legitimate expense — that is the root of saving profits tax. For organising vouchers see managing accounting vouchers and documents.
3. Profits tax: deductions, non-deductibles and depreciation allowances
Deductible expenses
Expenditure incurred in the production of assessable profits is generally deductible: staff salaries and employer MPF contributions, rent, utilities, rates, professional fees (accounting, audit, legal), advertising and marketing, business travel and communications, bad debts written off, interest on business borrowing (subject to conditions), and approved charitable donations (not less than HK$100, capped at 35% of adjusted profits).
Non-deductible items
Domestic and private expenditure, capital expenditure and losses, amounts recoverable under insurance or an indemnity, expenditure not incurred in producing assessable profits, and profits tax itself and penalties are not deductible. Directors' personal spending paid from the company account is the item most often disallowed on audit and adjustment.
Depreciation allowances
| Asset class | Initial allowance | Annual allowance |
|---|---|---|
| Plant and machinery (general) | 60% of cost | 10%, 20% or 30% on the reducing value, depending on class |
| Prescribed fixed assets (computer hardware and software, manufacturing machinery) | 100% immediate deduction | |
| Industrial buildings | 20% of construction cost | 4% |
| Commercial buildings | — | 4% |
| Refurbishment of commercial premises | Deducted in five equal instalments over five years of assessment | |
Losses
Business losses may be carried forward indefinitely against future assessable profits of the same business, but cannot be carried back, and cannot be offset between group companies (Hong Kong has no group loss relief). So a loss year is all the more reason to file on time and record the loss formally so it can be used later.
4. Salaries tax: rates and computation
Salaries tax is charged at the personal level, and an owner who is a director and employee faces it too.
Two computations, the lower applies
There are two methods, and the IRD automatically applies whichever produces the lower tax:
- Progressive rates: on net chargeable income (after allowances), banded from 2% to 17%.
- Standard rate: on net total income (before allowances).
Progressive rates (first four bands of HK$50,000 each)
| Net chargeable income | Rate |
|---|---|
| First HK$50,000 | 2% |
| Next HK$50,000 | 6% |
| Next HK$50,000 | 10% |
| Next HK$50,000 | 14% |
| Remainder | 17% |
The two-tiered standard rate
| Net total income | Standard rate |
|---|---|
| First HK$5,000,000 | 15% |
| Remainder | 16% |
A correction: it is sometimes said — including in an earlier version of this article — that the two-tiered standard rate started in 2025/26. Accurately, it applies from the year of assessment 2024/25 and continues thereafter. It affects only high earners on the standard rate (net income above HK$5 million); most taxpayers are still assessed at progressive rates.
5. From 2026/27: allowances increased across the board
Under the Inland Revenue (Amendment) (Tax Concessions, Special Deductions and Allowances) Bill 2026 gazetted on 6 March 2026, implementing the Policy Address and the 2026/27 Budget, several allowances rise from the year of assessment 2026/27:
| Allowance | 2025/26 and before | From 2026/27 |
|---|---|---|
| Basic allowance | 132,000 | 145,000 |
| Single parent allowance | 132,000 | 145,000 |
| Married person's allowance | 264,000 | 290,000 |
| Child allowance (each) | 130,000 | 140,000 |
| Additional child allowance (newborn) | 130,000 | 140,000 |
| Dependent parent / grandparent (aged 60+, not living with you) | 50,000 | 55,000 |
| Dependent parent / grandparent (aged 60+, living with you) | 100,000 | 110,000 |
| Dependent parent / grandparent (aged 55–59, not living with you) | 25,000 | 27,500 |
| Dependent parent / grandparent (aged 55–59, living with you) | 50,000 | 55,000 |
There is also an important relaxation for new parents: the additional allowance for a newborn extends from the year of birth to the first two years of assessment. The deduction cap for elderly residential care expenses rises at the same time. The IRD will use the new figures when assessing provisional salaries tax for 2026/27.
Our view: stacking allowances is the biggest engine for saving salaries tax. The core of salaries tax planning is that allowances stack. Basic, married, child and dependent parent allowances all combine according to your family circumstances. For example, a married taxpayer with two children supporting two co-resident parents aged over 60 accumulates, in 2026/27, 290,000 + 140,000 × 2 + 110,000 × 2 = HK$790,000 in allowances alone, cutting chargeable income sharply. Many people simply fail to claim allowances they are entitled to and overpay as a result. Before filing, work through your family circumstances and claim every one.
6. Salaries tax: the approved deductions people forget
Beyond allowances, a further set of approved deductions reduces chargeable income — and these are the most commonly missed:
- Mandatory MPF contributions (subject to an annual cap)
- Approved charitable donations (not less than HK$100)
- Self-education expenses (courses related to your current or intended trade)
- Home loan interest (owner-occupied property, subject to a period and cap)
- Domestic rent (for taxpayers who do not own the property they live in)
- Voluntary Health Insurance Scheme (VHIS) premiums
- Qualifying annuity premiums and tax-deductible voluntary contributions (TVC)
- Elderly residential care expenses (cap increased from 2026/27)
- Disabled person and disabled dependant allowances
Note that some items are mutually exclusive — home loan interest and domestic rent cannot both be claimed — so compare the combinations before claiming.
7. Return types and deadlines
| Return | Who files it | Purpose |
|---|---|---|
| BIR51 | Corporations (limited companies) | Profits tax |
| BIR52 | Persons other than corporations (e.g. partnerships) | Profits tax |
| BIR54 | Non-resident persons | Profits tax |
| BIR60 | Individuals | Salaries tax, sole proprietorship profits, property tax and personal assessment |
| BIR56A + IR56B | Employers | Reporting employees' and directors' remuneration |
*Note: the profits of a sole proprietorship are reported in the individual return BIR60, not in a separate profits tax return — something many sole proprietors get wrong.
Profits tax block extension dates for 2025/26
| Accounting date code | Year end falls between | Extended due date | Electronic filing due date |
|---|---|---|---|
| "N" code | 1 April to 30 November | No extension | 4 June 2026 |
| "D" code | 1 December to 31 December | 31 August 2026 | 2 October 2026 |
| "M" code | 1 January to 31 March | 16 November 2026 | 16 December 2026 |
| "M" code (current year loss) | 1 January to 31 March | 1 February 2027 | 1 February 2027 |
Other deadline points
- Profits tax (BIR51/52): issued on the first working day of April each year, to be filed within 1 month of issue.
- Individuals (BIR60): about 2.77 million issued on 4 May 2026; one month for most people (about 4 June), three months for those running a sole proprietorship (about 4 August), with online filing generally granting an automatic extra month.
- Employer's return (BIR56A): issued on the first working day of April, to be filed within one month; it must be returned even with no employees.
- A new company's first profits tax return: issued about 18 months after incorporation, with about three months to file, and generally no further extension.
- Chargeable profits but no return received: under section 51(2), notify the Commissioner in writing within 4 months after the end of the basis period.
For the year's sequence see the 2026 tax calendar for Hong Kong founders.
Our view: the hidden extension dividend of appointing a tax representative. Appointing a tax representative — a professional filing service — brings the company within the block extension scheme, pushing the deadline back by months depending on the accounting date. For an M-code company, the deadline moves from one month after issue to November or even December — over half a year more. That hidden dividend not only gives you time to prepare the audit and the return properly, it removes the risk of errors made against a deadline. For a company filing itself with only one month, this time difference is the most underrated part of professional representation. Stepcon handles extension applications free of charge.
8. Electronic filing: which companies are actually covered?
An important correction: it is sometimes said — including in an earlier version of this article — that from 2025/26 corporations must file profits tax returns electronically. That leads ordinary SMEs to think they are caught. The accurate position is below.
The first phase of mandatory electronic filing
The first phase of mandatory electronic profits tax filing takes effect from 1 April 2026 and applies only to Hong Kong Part 4AA entities of multinational enterprise groups within the scope of Pillar Two and the global minimum tax (generally, annual consolidated group revenue of EUR 750 million), which must file the BIR51 or BIR52 electronically for years of assessment beginning on or after 1 April 2025 (that is, from 2025/26). The requirement is in section 51AAB of and Schedule 65 to the Inland Revenue Ordinance.
Where ordinary SMEs stand
Other businesses may still choose paper or voluntary electronic filing for now. The IRD has said it will extend the requirement to SMEs progressively, aiming for full implementation before 2030. Those filing electronically on a voluntary basis receive one extra month beyond the normal deadline.
One requirement that is already mandatory
All supplementary forms must be filed electronically. Whichever mode is used to file the profits tax return for years of assessment 2020/21 to 2026/27, every supplementary form — S1 for the two-tiered rates, S2 for transfer pricing, S3 for research and development expenditure, S19 for specified foreign-sourced income — must be uploaded as an XML file through the electronic filing services of the BTP or TRP.
Electronic filing also requires financial statements and tax computations prepared in iXBRL format. See iXBRL electronic filing and block extensions.
9. Provisional tax, holding over and objections
Provisional tax
A Hong Kong tax bill has two parts: the tax payable for the current year, plus provisional tax for the next year, charged in advance on this year's profits. So the first bill is often close to double what people expect — and this is where new company owners are most often caught out. Provisional tax is generally payable in two instalments and set off against the following year's assessment.
Holding over provisional tax
An application must be made in writing, using form IR1121, signed and returned to the IRD. It must reach the Department by the later of 28 days before the due date for the provisional tax, or 14 days after the date of the notice for payment of provisional tax. Common grounds include assessable profits for the year being expected to be less than 90% of the previous year's, the business having ceased or being about to cease, tax losses brought forward available for set-off, or an objection having been lodged against the relevant assessment.
Objecting to an assessment
If you disagree with an assessment, the notice of objection must be received by the IRD within one month of the date of the notice of assessment — received, not posted. You may state your grounds in writing, complete form IR831, or submit through eTAX. Where you are objecting to an estimated assessment issued because no return was filed, the completed return and accounts must be submitted with the objection.
10. Late filing penalties at a glance
| Situation | Basis | Consequence |
|---|---|---|
| Failing without reasonable excuse to file on time, or filing an incorrect return | Inland Revenue Ordinance s.80(2) | On conviction, a fine of up to HK$10,000 plus a further fine of three times the tax undercharged |
| Where no prosecution is brought under s.80(2) or s.82(1) | s.82A | Additional tax of up to three times the tax undercharged; the Commissioner must first give written notice allowing not less than 21 days for representations |
| Wilful evasion | s.82 | A criminal offence carrying higher fines and imprisonment |
| Not filing at all | — | An estimated assessment may be issued, often higher than the tax actually due |
| Late payment of tax | — | 5% surcharge, with a further 10% if unpaid after six months |
| Failing to keep business records for 7 years | s.51C | Fine of up to HK$100,000 |
The IRD publishes a penalty policy calculating penalties as a percentage of the tax undercharged, graded by the number of offences within five years and by case group, with markedly higher rates for repeat offenders. So put a first late filing right immediately and apply for relief — Stepcon handles penalty waiver applications free of charge.
Lawful ways to save
Lawful saving is accurate reporting and claiming everything you are entitled to — not concealment or loophole-hunting.
Profits tax
- Keep your expense vouchers: each legitimate operating expense voucher is evidence for a deduction and must not be lost (the law requires seven years' retention).
- Use depreciation allowances: prescribed fixed assets such as computer hardware and software qualify for a 100% immediate deduction, so the timing of purchases can be planned.
- Distinguish capital from revenue correctly: refurbishment of commercial premises is deductible over five equal years — do not treat it as capital and claim nothing.
- Remember the S1: electing the two-tiered 8.25% rate requires supplementary form S1, filed electronically.
- Record losses: file on time in a loss year so the loss is formally recorded and available to carry forward.
- Consider an offshore claim: where operations genuinely take place outside Hong Kong, an offshore profits exemption may be available — but the evidence must be there.
Salaries tax
- Claim every allowance: review your family circumstances and claim everything you qualify for (all increased from 2026/27).
- Use the approved deductions: mandatory MPF contributions, approved charitable donations, self-education expenses, VHIS, TVC, domestic rent.
- Consider personal assessment: if you have business or rental income, work out whether personal assessment produces a lower bill.
- Plan the split sensibly: on the two-streams principle, set the balance between directors' remuneration and retained company profit deliberately.
Our view: real saving comes from planning the year, not patching at filing time. The people who genuinely reduce their tax plan across the whole year rather than scrambling when the return arrives — how expenses are recorded, when assets are bought, how remuneration is set, how the audit hands over to the return. Filing simply reports the results of that planning accurately. With accounting, audit and filing followed by one team through the year, the saving actually materialises.
Common filing mistakes
- Missing allowances or deductions: not claiming what you are entitled to, and overpaying.
- Not filing the S1 and losing the two-tiered rate: assuming the return alone secures 8.25%.
- Missing the deadline: late filing brings fines and possible prosecution.
- Chargeable profits with no return received, and no notification: failing to notify the IRD within four months after the end of the basis period.
- Omitting or misreporting income: omitted income brings back tax and heavy penalties.
- Sole proprietors filing a separate profits tax return: sole proprietorship profits belong in the BIR60.
- Overlooking provisional tax: no cash set aside in year one, and a liquidity squeeze when the bill arrives.
- Inadequate record keeping: business records must be kept for at least seven years, or a fine of up to HK$100,000 applies.
- Mixing company and personal money: directors' personal spending in the company's books is disallowed on audit and adjustment.
Most of these are avoided with professional review. For more accounting traps see the top 10 accounting mistakes.
FAQ
Do both the company and the owner have to file?
Yes. A limited company is a separate legal person and files profits tax on its profits (BIR51); as a director and employee, the owner files salaries tax on salary and directors' fees (BIR60). They are separate taxpayers filing separately — two streams.
What are Hong Kong's profits tax rates?
Two-tiered. Corporations: 8.25% on the first HK$2 million of assessable profits and 16.5% thereafter. Unincorporated businesses (sole proprietorships, partnerships): 7.5% on the first HK$2 million and 15% thereafter. Only one entity in a group of connected entities may elect the two-tiered rates, and supplementary form S1 must be filed electronically to make the election.
What changes to allowances take effect in 2026/27?
From the year of assessment 2026/27: basic and single parent allowances rise from HK$132,000 to HK$145,000; married person's allowance from HK$264,000 to HK$290,000; child and additional child allowances from HK$130,000 to HK$140,000; dependent parent / grandparent (aged 60+) from HK$50,000 to HK$55,000 where not living with you and from HK$100,000 to HK$110,000 where they are. The additional newborn allowance also extends from the year of birth to the first two years of assessment.
How is salaries tax computed, and when did the two-tiered standard rate begin?
Whichever of two methods produces the lower tax: progressive rates on net chargeable income in five bands at 2%, 6%, 10%, 14% and 17% (the first four bands HK$50,000 each); or the standard rate on net total income. The two-tiered standard rate applies from the year of assessment 2024/25 — 15% on the first HK$5 million and 16% on the remainder — affecting only high earners with net income above HK$5 million.
When is the profits tax return (BIR51) due?
Issued on the first working day of April each year and due within one month of issue. Appointing a tax representative brings block extensions: for 2025/26, "N" code has no extension (electronic 4 June 2026); "D" code 31 August 2026 (electronic 2 October); "M" code 16 November 2026 (electronic 16 December); "M" code loss cases 1 February 2027.
Must every company file electronically?
No. The first phase of mandatory electronic filing takes effect from 1 April 2026 and applies only to Hong Kong Part 4AA entities of multinational enterprise groups within the global minimum tax regime (from 2025/26). Other businesses may still choose paper or voluntary electronic filing for now, with the IRD aiming for full implementation before 2030. Whichever mode you use, all supplementary forms must be filed electronically.
I have chargeable profits but no return has arrived — does that matter?
Yes. Under section 51(2) of the Inland Revenue Ordinance, where you have chargeable profits and no return has been received, you must notify the Commissioner in writing within 4 months after the end of the basis period for the year of assessment, or you may be fined. Not receiving a return does not remove the obligation.
What happens if I file late?
Under section 80(2), on conviction a fine of up to HK$10,000 plus three times the tax undercharged; where no prosecution is brought under section 80(2) or 82(1), additional tax of up to three times may be assessed under section 82A. An estimated assessment may also be issued. Late payment carries a 5% surcharge and a further 10% after six months.
Can provisional tax be held over?
Yes, on a written application (form IR1121), which must reach the IRD by the later of 28 days before the due date for the provisional tax, or 14 days after the date of the notice for payment. Common grounds include profits expected to be less than 90% of the previous year's, the business having ceased, or losses brought forward.
How do I save tax lawfully?
By reporting accurately and claiming everything you are entitled to. For profits tax: keep your expense vouchers, use depreciation allowances (prescribed fixed assets qualify for a 100% immediate deduction), distinguish capital from revenue correctly, and remember the S1 to get 8.25%. For salaries tax: claim every qualifying allowance (they stack) and every approved deduction. Best of all, plan across the year rather than patching at filing time.
Plan your filing, stay compliant and pay what you owe
Hong Kong tax filing runs on two lines: the company files profits tax and the owner files salaries tax. Hold to the principles — understand the two streams, stack your allowances (all higher from 2026/27), and plan across the year rather than patching at filing time. Take the block extension dividend that comes with a tax representative, remember the S1 to secure the 8.25% rate, and claim every allowance and deduction you are entitled to.
Stepcon Business Services joins bookkeeping, audit and filing into one service — bookkeeping, audit arrangement and tax filing. As your tax representative we file profits tax and salaries tax accurately, secure the extensions available and find the lawful savings — returns at HK$270 each, with extension and penalty waiver applications free of charge. Just incorporated? See what to do after incorporation and plan your tax position early.
Want your filing handled in one place? Get in touch: call 3687-1127 or message us on WhatsApp / WeChat at 9700-6312 for a free consultation and an accurate quote.
