4. I was laid off. I received from my employer (a) payment in lieu of notice and (b) severance/long service payment. Are these taxable?

4. I was laid off. I received from my employer (a) payment in lieu of notice and (b) severance/long service payment. Are these taxable?

Payment in lieu of notice accrued on or after 1 April 2012, if paid under the Employment Ordinance (“EO”) or the employment contract, is taxable. For more information about the statutory calculations of payment in lieu of notice, severance payment and long service payment, please click here.

Severance and/or long service payment, if computed in accordance with the formula laid down in the EO, is non-taxable. However, if the sum paid to you exceeds the amount so calculated, the excess is an extra award for your services and is part of your assessable income.

The amount not assessable to Salaries Tax should be computed after deduction of:

1. contract gratuities based on length of service;
2. benefits paid under an occupational retirement plan that are due to employer contributions and linked investment return; and
3. accrued benefits related to employer contributions and investment return that are either held in an MPF plan or have already been paid.

Example 1 - No contract gratuity, or scheme benefit or MPF scheme benefit to offset statutory entitlement

After working for 8 years, an employee left his employment. By applying the formula in the EO, his entitlement to severance payment was $80,000, but his employer paid him $100,000. His tax position is as follows:

Non-assessable amount = Statutory entitlement calculated under EO

Example 2 - Contract gratuities based on length of service and no severance package

An employee was entitled to severance payment of $80,000 under EO but at the same time was also entitled to contract gratuities of $100,000 based on length of service. EO provides that the severance payment can be reduced by the amount of contract gratuities, and since his contract gratuities were greater than his statutory right under EO (i.e., $80,000), the company strictly was under no obligation to provide him with a severance package. The employee would be in the following tax position:

To lower the tax responsibility, the employee may request relating back with regard to the gratuity. For more information in relation to relating back of contract gratuities, please click here.