Profits tax for an unincorporated business at the 7.5 percent and 15 percent rates.
Profits tax payable
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Assessable profits
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MPF deducted
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Effective rate
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Profit after tax
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Your breakdown
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Why a sole proprietor pays the lower set of rates
A Hong Kong sole proprietorship is an unincorporated business, and that single classification decides which rates apply. Unincorporated businesses pay profits tax on a two-tier scale, with a lower rate on the first slice of profit and a higher rate on the rest. The rates this calculator applies are 7.5 percent on the first $2 million of assessable profits and 15 percent above that. Those are exactly half the incorporated company rates of 8.25 and 16.5 percent, which is the structural reason a small operator often pays less profits tax as a sole trader than through a company. Confirm the current rates and the $2 million threshold with the IRD, since they are Budget-set figures.
Assessable profits are your business revenue less the expenses incurred in earning it. On top of ordinary business costs, a self-employed person's mandatory MPF contributions are deductible, which the MPFA and the IRD cap at $18,000 a year. A partnership is taxed the same way, each partner on their share. This tool takes your revenue, your allowable expenses, and your MPF, and runs the two-tier sum.
A consultancy with $3.5 million of revenue, crossing the two tiers
To see both tiers actually working, take a freelance consultancy billing $3.5 million, with $900,000 of allowable expenses and the full $18,000 of self-employed MPF. That leaves $2,582,000 of assessable profit, which spills past the $2 million mark, so part is taxed at 7.5 percent and the rest at 15 percent.
The blended effective rate is about 9.19 percent, well under the top 15 percent rate, because the cheap first tier dilutes the whole bill. The chart shows the two slices of profit and the tax each one carries.
The records that protect your expense claims
The whole tax bill hinges on the expense figure, and this is where sole traders lose money or invite trouble. Only expenses incurred in producing the profits are deductible, so rent for business premises, staff wages, professional fees, and the like qualify, while private spending and most entertainment do not. Capital items, like equipment, are not deducted outright but may attract depreciation allowances instead. Keep receipts and a clean separation between business and personal accounts, because the IRD can ask you to substantiate everything for years after filing. A frequent mistake is claiming the full cost of something used partly for private purposes, such as a car or a home, when only the business proportion is allowable.
Worth knowing: a sole trader can also elect personal assessment, which pools business profit with other income and applies the salaries-tax allowances and progressive rates. For lower-profit businesses that election can beat the flat profits-tax rates, so it is worth modelling both before you file.
Can I deduct my own salary as a sole trader?
No. A sole proprietor and the business are the same legal person, so money you draw is not a deductible wage, it is simply profit you take out. The deductible MPF is your mandatory self-employed contribution, capped at $18,000, not a salary. This is a key difference from running a company, where a director's salary is deductible.
Is there a tax-free threshold for a sole trader?
Profits tax itself has no personal allowance, so tax applies from the first dollar of assessable profit at 7.5 percent. The personal allowances you may have heard of belong to salaries tax. You only access them against business profit if you elect personal assessment, which is why that election can matter for a small business.