What is the rental reimbursement scheme
Rental reimbursement is a popular housing benefit that allows you to reduce your taxes when your employer partially or wholly reimburses your residential rent, while maintaining the same income value paid to you each month. There are benefits for both employees and employers in the form of reduced tax payments and MPF contributions, and can result in a sizable chunk of savings as shown in the example below.
Benefits for Employees
The most obvious benefit of the rental reimbursement scheme is that your monthly rent can be partially or fully subsidized by your employer. While this may appear not to make much difference if that’s where your salary was going anyway, there’s another benefit that you will take notice of.
The second benefit is that this housing benefit is taxed separately from your cash salary at a cap of 10% of either your taxable income or actual paid rent, whichever is lower. As our example below demonstrates, this can greatly lower your income tax while maintaining your monthly income amount.
Benefits for Employers
Through the rental reimbursement scheme, employers gain an attractive offer to incentivize top talent, whether local or overseas, to work for them, which only improves the more value they can reimburse. Restructuring an employee’s salary to include the housing benefit also has the side effect of lowering the mandatory MPF contributions they have to make, as MPF contributions are calculated based on an employee’s cash salary.
Eligibility
Eligibility rules are generally dependent on the company’s policy, with the only common requirement across all companies being that you, as an employee, have to prove to your employer that you have a primary place of residence. This is usually done by providing them with your tenancy agreement and recent rental receipts.
Process
Once your employer has verified your residency and verified your eligibility according to company policy, they may go ahead and restructure your income makeup by modifying the employment contract or writing it as an addendum, attaching the tenancy agreement and receipts as reference. Your employer can then reimburse the rent to you or pay the landlord directly, depending on the terms of the agreement.
This housing benefit will need to be recorded in the Employer’s Return (IR56B form) as filed by your employer, and you will also need to include it in your Individual Tax Return.
Tax Computation Example
Below are two oversimplified examples of income taxes calculated by two employees, Abby and Beth, where each receives the same monthly income of HK$50,000, and each pays a monthly rent of HK$20,000, but Beth has opted to join the rental reimbursement scheme. Assume a flat income tax of 15%.
Monthly Income of Abby and Beth each = HK$50,000
Monthly Rent of Abby and Beth each = HK$20,000
- Payable tax without rental reimbursement – Abby
Abby gets paid a full cash salary of HK$50,000 monthly, amounting to a taxable income of HK$600,000 per year.
Monthly Income:
Taxable Income = Cash Salary (HK$50,000)
Taxable Income:
Cash Salary (HK$50,000) x 12 months = Taxable Income (HK$600,000/year)
Abby will owe HK$90,000 in taxes come tax season.
Payable Tax:
Taxable Income (HK$600,000) x 15% = Payable Tax (HK$90,000)
- Payable tax with full rental reimbursement – Beth
Beth’s income has been restructured to include a full rental reimbursement of HK$20,000, and as a result, her cash salary has been reduced to maintain the same total income value of HK$50,000, giving her a taxable income of HK$360,000.
Monthly Income:
Cash Salary (HK$30,000) + Rental Reimbursement ($HK20,000) = Monthly Income (HK$50,000)
Taxable Income:
Cash Salary ($30,000) x 12 months = HK$360,000/year
The rental reimbursement is taxed separately from cash salary at a cap of 10% of either the taxable income or actual paid rent, whichever is lower, and then added on top of the taxable income:
Taxable Rental Value:
Taxable Income (HK$360,000) x 10% = Taxable Rental Value (HK$36,000)
Taxable Income + Taxable Rental Value:
Taxable Value (HK$36,000) + Annual Cash Salary (HK$360,000) = Total Taxable Income (HK$396,000/year)
Beth’s total taxable income is then subjected to the 15% tax, resulting in a tax payable of HK$59,400.
Payable Tax:
Total Taxable Income (HK$396,000) x 15% = Payable Tax (HK$59,400)
- Tax Savings Compared
In this example, Beth saved HK$30,600 in payable tax by restructuring her income to include rental reimbursement, assuming all other factors were equal.
Abby’s Tax (HK$90,000) – Beth’s Tax (HK$59,400) = Difference of HK$30,600
Tax Computation Example with Rental Reimbursement
Conclusion
Rental reimbursement is a strong tax benefit that can help both you and your employer lower your salary taxes and MPF contributions respectively, without the need to re-negotiate your income. Check with your employer to see what the company’s policy is on rental reimbursements and if you qualify, and remember to record the benefit when you file your individual tax return!
