MPF, IR56B & Employment Ordinance: Hong Kong Payroll Compliance Outsourcing Guide

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“Wait, the MPF offsetting is gone? Since when?” That’s what a restaurant owner in Sheung Wan asked us in June 2025, two months after the May 1st abolishment. He’d just calculated severance payments the old way and was short by HK$120,000. Ouch.

This anecdote highlights a critical reality: compliance in Hong Kong isn’t about memorising every regulation. That’s a losing game when the regulations are constantly evolving. It’s about setting up the right systems and processes so you stay current without constant manual checking. We’ll discuss the best ways to keep up: leveraging proper software, working with expert providers, or building a strong in-house process.

But before diving into how to comply, you need to understand what the essential regulations are. If you’re running a business here, you need to be familiar with terms like MPF, IR56B, and the Employment Ordinance. Getting your compliance right means more than just knowing the acronyms – it means hitting every crucial deadline, nailing your calculations, and dodging costly penalties.

MPF Management: Beyond the Basic 5% Contribution

Every employer and employee contributes 5% of relevant income to approved MPF schemes, subject to minimum and maximum contribution levels:

Income Level	Employer Contribution	Employee Contribution
Below HK$7,100	5% of income	Exempt
HK$7,100 – HK$30,000	5% of income	5% of income
Above HK$30,000	HK$1,500 (capped)	HK$1,500 (capped)

This seems straightforward until you handle fluctuating salaries, mid-month joiners, unpaid leave situations, or employees with multiple income sources. Each scenario has specific calculation rules.

The May 2025 Offsetting Abolishment

From May 1, 2025, employers can no longer use their MPF contributions to offset statutory severance payments (SP) or long service payments (LSP). This fundamentally changed termination cost calculations.

Pre-May 2025: An employee with 10 years service earning HK$20,000 monthly might receive LSP of HK$133,333, but employer could offset using accumulated MPF contributions, potentially reducing cash outlay to zero.

Post-May 2025: The same employee gets full HK$133,333 LSP in cash, completely separate from MPF. Employers need separate reserves for these obligations.

According to the Hong Kong Labour Department, this affects all employment contracts and requires updated financial planning for businesses with older staff.

MPF Payment Deadlines and Penalties

Contributions must be paid to the MPF trustee by the 10th day of the contribution period’s following month. If the 10th falls on a Saturday, Sunday, or public holiday, payment is due on the preceding business day.

Late payment triggers:

• 5% surcharge on outstanding contributions
• HK$5,000 fine or 10% of the contribution amount (whichever is greater)
• For persistent defaults: fines up to HK$350,000 and imprisonment up to 3 years
• Daily penalties of HK$500 for continuing offenses

The Mandatory Provident Fund Schemes Authority (MPFA) actively prosecutes non-compliance. For example, in 2024, over 200 employers faced legal action for persistent MPF defaults (we really don’t want any of our clients to go through this).

Special Situations That Complicate MPF

It can be a little confusing figuring out who needs to be enrolled in the MPF. Here are the main things to remember:

• Your Casual Crew: If you have part-time or casual staff who work for 60 days or more within a 12-month period, they need to be enrolled. Even if they don’t seem like full-timers, those two months of work trigger the requirement!
• Employees on Unpaid Leave: Just because someone is taking unpaid leave doesn’t mean you can forget about them. They still need to be enrolled in the MPF system, even if the contribution amount for those affected months is $0.
• The “Double Dippers”: For employees working multiple jobs, all their contributions from different employers count toward their annual MPF contribution cap. It’s a shared cap, not one per job.
• Foreign Workers: While Foreign Domestic Helpers are exempt, most other foreign employees working in Hong Kong are covered by the MPF rules. Don’t assume non-local means non-MPF!

The trick is that every situation, like different leave types or multiple jobs, requires its own specific paperwork and calculation tweaks. Trying to track all of this by hand is practically an invitation for errors.

The Dreaded Tax Forms: IR56 Series

Dealing with the Inland Revenue Department (IRD) means dealing with the IR56 forms. They all sound the same, but they have very different jobs:

• IR56B: This is the big one—your Annual Report detailing what you paid every employee (the main focus here).
• IR56E: Tells the IRD when you hire someone new.
• IR56F: Tells the IRD when someone leaves the company.
• IR56G: For short-term contracts or employees visiting HK.
• IR56M: Reporting specific retirement scheme payments.

Who Needs an IR56B File? (The Surprises)

The general rule is: anyone earning more than the basic allowance (currently HK$132,000) needs an IR56B.

But here’s where most businesses trip up: you must file an IR56B for these people no matter how little they earn:

• All Directors (yes, even non-exec directors who get a tiny annual fee).
• Married persons who might have other income that needs to be assessed.
• Part-time staff who probably have other jobs.
• Employees who are seconded to Hong Kong from overseas.
• Anyone the IRD specifically asks you to report on.

The “Director Fee” Trap: We once worked with a startup that paid three non-executive directors a small HK$10,000 annual fee. They didn’t file the IR56B, assuming the amount was too small. The result? A HK$15,000 penalty plus three years of back-filing. Ouch!

What Counts as Reportable Income? (It’s Broader Than You Think)

The IR56B demands you report ALL remuneration. It’s much more than just a salary figure:

Definitely Reportable	The “Often Missed” Items
Salaries, wages, and bonuses	The value of rent-free or subsidised accommodation
Commissions and tips	Share options (even if granted before HK employment)
Holiday pay or payment in lieu of notice (PILON)	Contributions to retirement schemes beyond the standard MPF
Standard allowances (housing, travel, education)	Payments for the employee’s insurance premiums
	Benefits paid by your associated companies
	Reimbursement of personal expenses

Another Costly Error: A firm we know forgot to include the housing allowances they paid directly to landlords for their expat staff. An IRD audit caught it, leading to amended returns for 15 employees and a HK$45,000 fine.

The April Filing Deadline

The IRD sends out the green BIR56A envelope around the first working day of April. You have only one month – until the first working day of May – to file everything.

Talenox’s Tip: Using the IRD’s eTAX system typically gives you an extra two weeks, but you have to register first!

Employment Ordinance: The Basics

This is the rulebook for how you treat your staff…from pay to leave to termination. Getting this wrong leads straight to the Labour Department.

Getting Wage Payment Right

The law is very specific about when and how you pay wages:

• Payment Interval: Must be paid at intervals no longer than one month.
• Timing: Must be paid within 7 days following the end of the wage period.
• Final Pay: For terminated staff, final wages and accrued benefits must be paid within 7 days of termination (or notice expiry).

The Stakes are High: Late payment isn’t a slap on the wrist. Violations can lead to prosecution and huge fines up to HK$350,000, plus up to 3 years in prison.

Statutory Leave: The Details that Matter

Hong Kong mandates multiple leave types with specific accrual rules:

Statutory Holidays: 12 days annually (increasing to 13 in 2026, 14 in 2027, continuing to 17 by 2030). These are specific calendar dates, not floating holidays.

Annual Leave: Accumulates based on years of service:

• Years 1-2: 7 days per year
• Year 3: 8 days
• Year 4: 9 days
• Year 5: 10 days
• Continuing to 14 days from year 9 onward

Calculation pro-rates for incomplete years. Many employers miscalculate by using calendar years instead of employment anniversary dates.

Sick Leave: Accumulates at 2 paid sick days per month of employment, up to 120 days maximum accumulation. Requires appropriate medical certificates.

Maternity Leave: 14 weeks (10 weeks at 4/5 pay, 4 weeks unpaid), with recent amendments expanding protections.

Paternity Leave: 5 days at 4/5 daily average wages, to be taken within a specified period around the child’s birth.

Incorrect leave calculations frequently trigger Labour Department complaints and require backpayment of unpaid leave or wrongly deducted amounts.

Termination Payments

Under Section 31G and 31O, for employees with at least 24 months of service, you owe either Severance Payment (SP) or Long Service Payment (LSP) upon termination, depending on the reason.

Severance Payment (SP): Payable when dismissing by reason of redundancy. Formula: (last month’s wages × 2/3) × years of service, capped at HK$390,000.

Long Service Payment (LSP): Payable when employee resigns after 5+ years or employer terminates for reasons other than summary dismissal. Same formula as SP.

Remember: From May 1, 2025, MPF contributions no longer offset these payments. Every dollar must be paid in cash.

Wage and Employment Records

Section 46A requires employers maintain records for each employee showing:

• Total wages paid and payment date
• Wage period covered
• Period and amount of any wage deductions
• Other employment particulars

Records must be retained for 12 months after employment ends. Failure to maintain proper records: HK$100,000 fine.

Labour Department inspectors regularly request employment records during investigations. Disorganised or missing records significantly weaken your position in disputes.

Work Visas: Don’t Risk Jail Time

If you employ foreign nationals, immigration compliance isn’t just an HR issue—it’s a major legal risk for the company.

• Match the Job: The employee’s work must exactly match the position and company approved on their visa. If the job changes significantly, you need to notify Immigration.
• Active Visa Required: If a visa expires, the employee must stop working, even if the renewal application is “pending.”

The Penalty: Employing someone without a valid visa can result in a HK$350,000 fine and up to 3 years in prison for the employer!

Talenox’s Tip: Start the visa renewal process 2-3 months before the expiry date. A financial firm learned this when three employee visas expired during renewal processing, leading to a HK$150,000 fine.

Audit Preparation and Documentation Requirements

No one enjoys the thought of an audit, but in Hong Kong, both the Labour Department and the IRD have the power to check your books. Knowing what triggers these checks and what they expect can save you a world of pain.

What Puts You on the Audit Radar?

An audit doesn’t necessarily mean you’ve done something wrong, but certain actions definitely flag you for attention.

The most common trigger is an employee complaint to the Labour Department – they often initiate an investigation if a worker disputes their pay or leave.

Beyond that, the IRD performs random checks or launches industry-wide campaigns to verify compliance. You also become a target if you submit statutory forms (like the IR56B) late, miss them entirely, or if there are clear discrepancies between the various forms you submit. Essentially, anything that signals inconsistency or non-compliance could get you a notice.

What Documentation Do You Need to Keep on Hand?

When the Labour Department arrives, they aren’t looking for broad summaries; they want the granular detail that proves you followed the Employment Ordinance. This means you must be able to instantly produce employment contracts for all staff, detailed wage records showing when and how much was paid, and precise leave records covering applications, approvals, and current balances. They will also request attendance records and complete MPF enrolment and payment confirmations.

The IRD, on the other hand, focuses on financial remuneration. They require complete remuneration records showing all income and benefits (including those tricky, often-missed items like subsidised accommodation), plus all the documentation that supports your IR56 form submissions. If your business deals with executive pay, they’ll also scrutinise records of any share option grants and exercises and evidence showing that you correctly categorised all expense reimbursements as business or personal.

The Timeline: Why Speed Matters

Once an audit notice is served, you typically have a very tight window – usually 14 to 21 days – to produce all the requested documentation. While you can sometimes request a small extension, it’s never guaranteed. Failure to provide complete records within that timeframe doesn’t just result in a penalty; the authorities may make adverse presumptions against your business, significantly weakening your position in any dispute.

This is why relying on manual spreadsheets is so risky. Trying to reconstruct years of wage data, leave accruals, and benefit valuations within a two-week crunch period is a recipe for error and panic. Professional HR systems eliminate this scramble by maintaining all this documentation automatically, complete with audit trails that show who entered data, when, and what changed. That level of verifiable, ready-made documentation is your best defense against audit penalties.

The Solution: Why Manual Tracking Fails

Trying to manage all of this – the complex IR56 reporting, the changing leave accruals, the new termination rules, and dozens of deadlines using spreadsheets is nearly impossible. Manual tracking makes errors inevitable.

Good systems aren’t just for big corporations; they are essential tools for risk management.

Automated Statutory Calculations

Professional payroll systems calculate MPF contributions considering wage ceilings, exemption thresholds, and special situations. IR56B data compilation tracks all remuneration components throughout the year. Leave accruals follow Employment Ordinance rules with service year calculations. Termination payments apply post-May 2025 rules correctly.

Talenox’s Hong Kong platform includes all these calculations built-in with regulatory updates pushed automatically.

Deadline Tracking and Alerts

Unliked humans, systems don’t just forget critical deadlines:

• MPF contributions due 10th of following month
• IR56B filing window (April-May)
• Visa expiry dates with advance warnings
• Wage payment deadlines (7 days post period-end)

Automated reminders mean you’re never caught off-guard by approaching deadlines.

Comprehensive Audit Trail Maintenance

Every transaction in professional systems creates audit trails showing who made changes, when, why, and what the previous values were. This documentation is exactly what Labour Department and IRD need during audits.

Integration With Statutory Submissions

Leading platforms like Talenox integrate directly with MPFA, IRD, and Immigration Department systems for electronic submissions, confirmation tracking, and status monitoring.

Ready to Ditch the Spreadsheets and the Worry?

This reminds me of a client we spoke to years ago. A retail chain with 6 locations was managing payroll separately at each location. Due to different practices at different locations, this meant that some locations filed IR56B late. There was also one location which miscalculated leave. Furthermore, MPF deadlines varied at different locations as well. 

Solution: We recommended the client to partner with one of our Payroll Experts for centralised compliance management, while also using Talenox software for daily operations. This ended up standardising the HR processes across their 6 locations, and gave them peace of mind.

Frankly speaking, compliance should be a safety net for your business, not a source of constant anxiety. 

We’re here to help you figure out the best approach:

• Do It Yourself (with tools): Use a powerful platform like Talenox to automate all these calculations, tracking, and deadlines internally.
• Expert Backup: Use software like Talenox for daily operations but engage partners like Payroll Experts for complex statutory filing, audits, and advice.
• Full Outsourcing: Hand everything over to specialised providers for total peace of mind (speak to us).

Ready to get some much-deserved peace of mind? Contact us today to review your situation. We’ll help you find the compliance strategy that protects your business and lets you sleep soundly at night, knowing you haven’t missed a critical deadline or calculation.