Since 1 May 2025, calculating severance payments (SP) and long service payments (LSP) in Hong Kong has involved an extra step. The formula itself has not changed, but for any employee whose service spans that date, the payment now has to be calculated in two parts, each with different offsetting rules. In our experience, this is where payroll errors are most likely to happen.
What changed, and what did not
From the transition date of 1 May 2025, employers can no longer use the accrued benefits of their mandatory MPF contributions to offset SP or LSP for service from that date onwards. Accrued benefits from voluntary MPF contributions can still be used to offset SP and LSP, for service both before and after the transition date.
The underlying formula is unchanged. For a monthly-paid employee, SP or LSP is two-thirds of the last full month's wages for each year of service, based on a monthly wage capped at HK$22,500, with the total capped at HK$390,000. The employee may instead elect to use average wages over the last 12 months.
The abolition is not retrospective, which is why the two-part calculation is needed.
How the two-part calculation works
Pre-transition part: service up to 30 April 2025, calculated using the standard formula on the employee's wage at that point. The employer can still offset this portion using accrued MPF benefits from both mandatory and voluntary contributions, regardless of when those contributions were made.
Post-transition part: service from 1 May 2025 onwards, calculated the same way but based on wages nearer the termination date. This portion can only be offset using voluntary contributions, not mandatory ones.
A worked example
An employee earning a steady HK$22,500 a month worked two years before the transition date and three years after, giving five years of service in total.
- Pre-transition part: (22,500 x 2/3) x 2 = HK$30,000
- Post-transition part: (22,500 x 2/3) x 3 = HK$45,000
- Combined SP/LSP: HK$75,000
The employer can still offset the HK$30,000 pre-transition part using accrued mandatory MPF benefits. The HK$45,000 post-transition part must be paid in cash, unless the employer has accrued voluntary contributions to offset it. Compared with the old arrangement, that is a direct increase in the cash cost of the termination.
Other points to note
- Where the combined SP/LSP exceeds the HK$390,000 cap, the excess is deducted from the post-transition part first, protecting the pre-transition entitlement.
- If a monthly-paid employee had less than one month of service before the transition date, the pre-transition part is calculated on the first full month's wages after starting. Daily-rated or piece-rated employees with fewer than 30 normal working days before the transition use any 18 days' wages from their first 30 normal working days.
- Employees who left before 1 May 2025 are not affected. Their full SP/LSP can still be offset using both mandatory and voluntary contributions as before.
- A 25-year government subsidy scheme helps employers share the cost of post-transition SP/LSP. Eligible employers must apply within three months of making the payment.
- The Labour Department's online calculation tool can model the split for individual cases and is worth using before finalising any termination payment.
What HR should check now
For every employee whose service crosses 1 May 2025, confirm the exact pre- and post-transition service length before calculating anything. A miscounted split changes both the amount due and what can be offset.
Track accrued mandatory and voluntary MPF contributions separately in payroll records, since only voluntary contributions can offset the post-transition part. Budget for post-transition SP/LSP as a cash cost rather than assuming MPF will cover it, and apply for the government subsidy within the three-month window whenever a payment qualifies.
Our view
Most of the compliance risk here is arithmetic rather than interpretation. The formula and caps are the same, but every termination involving a long-serving employee now needs two dates, two service counts and two offsetting checks. Getting the split wrong is an avoidable error with a direct cash cost.
If you would like support reviewing payroll processes or termination calculations, contact the iTalent team. We also provide payroll outsourcing for employers who prefer to hand this work to a specialist.
