The transition date
The Employment and Retirement Schemes Legislation (Offsetting Arrangement) Ordinance 2022 came into operation on 1 May 2025, which the law calls the transition date[1]. The change applies to employees who cease to be employed on or after that date[2], and it has no retrospective effect[3]. It also covers occupational retirement schemes and the two school provident funds, not only MPF[3].
What can still offset severance or long service pay
| Money used to offset | Service before 1 May 2025 | Service from 1 May 2025 |
|---|---|---|
| Accrued benefits from employer mandatory MPF contributions | Can offset | Cannot offset |
| Accrued benefits from employer voluntary MPF contributions | Can offset | Can offset |
| Gratuities based on years of service | Can offset | Can offset |
For an employee who started before the transition date and leaves on or after it, the employer can still use MPF derived from all its contributions, mandatory or voluntary and whether paid before, on or after the transition date, to offset the portion for years of service before that date[2]. Employees outside the MPF System, such as domestic helpers, employees under 18 at termination and those 65 or above when employment began, are not affected[4].
How the payment is now split
For employment that began before 1 May 2025, the severance or long service payment is divided into a pre-transition portion and a post-transition portion[5].
- The pre-transition portion is calculated on the last full month's wages immediately preceding the transition date, or, at the employee's choice, the average monthly wages over the 12 months before 1 May 2025[5].
- The post-transition portion is calculated on the last full month's wages immediately preceding termination, or the average monthly wages over the last 12 months[5].
- In both calculations the Labour Department states a ceiling of two thirds of HK$22,500, which is HK$15,000[5].
- The total of both portions stays capped at HK$390,000, and any excess comes off the post-transition portion[5].
The government subsidy
The Labour Department's Subsidy Scheme for Abolition of MPF Offsetting Arrangement shares employers' cost of the post-transition portion over 25 years[2]. The employer pays the employee under the Employment Ordinance first and then applies[3], within three months after paying[2]. The subsidy is worked on the net post-transition portion actually paid, after any voluntary contributions or gratuities used to offset it[6]. For applications within the first HK$500,000 of an employer's net post-transition payments in a subsidy year, the subsidy is the greater of the two amounts below[6].
| Subsidy year | Period | Share of the net post-transition portion | Or the amount above this cap per employee |
|---|---|---|---|
| 1 to 3 | 1 May 2025 to 30 April 2028 | 50% | HK$3,000 |
| 4 | 1 May 2028 to 30 April 2029 | 45% | HK$25,000 |
| 5 | 1 May 2029 to 30 April 2030 | 40% | HK$25,000 |
| 6 | 1 May 2030 to 30 April 2031 | 35% | HK$25,000 |
| 7 | 1 May 2031 to 30 April 2032 | 30% | HK$50,000 |
| 8 | 1 May 2032 to 30 April 2033 | 25% | HK$50,000 |
The ratios for later years, and for applications beyond the HK$500,000 threshold, are set out in the same Labour Department document[6].
Tax for the employee
Severance payment calculated under the Employment Ordinance is not chargeable to salaries tax, and neither is the statutory amount of long service payment; a long service payment above the statutory amount is chargeable[1].
What to do as an employer
- Keep each long serving employee's wage record for the month before 1 May 2025, because the pre-transition portion is calculated from it[5].
- Keep employer voluntary and mandatory contributions separately identified, since only voluntary ones offset post-transition service[4].
- Treat the post-transition portion as a cash cost in your forecasts, net of any subsidy you expect.
- Use the Labour Department's EasyCal tool on its offsetting portal to estimate a payment before you agree it[7].
Rules, forms and figures can change, and the official pages listed below are the authority wherever this summary differs from them.