Updated: Apr 19
There are 2 things that are inescapable in life: compound interest, and getting audited by the Malaysian Inland Revenue Board (LHDN). Since everything in payroll is linked to taxes, and tax accounting, running afoul of the LHDN by not complying with regulations can result in costly fines. In this blog, we take a look at a little bit of how payroll deductions work in Malaysia.
1. Monthly Tax Deduction/Potongan Cukai Bulanan (PCB)
PCBs are a series of monthly deductions from an employee’s taxable income that go towards the payment of said tax to the LHDN.
PCB exemptions – There are certain items that are not liable to PCB and are therefore fully or partially exempt from the taxable income of an employee. Some of these items may include travel expenses, phone bills, parking fees, childcare expenses, and more. Here are some examples:
It should be noted that the exemptions above are not available to employees who exercise control over their employer (ie they are the owner or partner or the affairs of the company are conducted according to their wishes due to their shareholding or voting power). Also note that the amount chargeable to tax in respect of payments by the employer can be reduced if the employee makes use of such amenities in the performance of his official duties, on the condition that such official duties can be substantiated with a certification by the employer.
PCB deductions – These are deductions that can be made from the taxable income of an employee, and are affected by various factors: marriage status, number of children, if any, et cetera. EPF and SOCSO contributions count toward the monthly deductions, alongside personal tax relief, lifestyle relief, and certain medical expenses.
How is the PCB calculated? The simplest way we can put it is:
Annual taxable income = Previous months taxable income + (Recurring current month taxable income + Non-recurring current month taxable income) + Recurring current month taxable income * Number of months remaining in the year.
Annual taxable income – Deductions = Annual chargeable income.
Total yearly tax is then calculated on the annual chargeable income.
PCB = (Total yearly tax – PCB already paid)/Number of months remaining.
You may get the Tax Rate Assessment for the year at the official LHDN portal by clicking here.
That looks pretty complicated, and that’s just the calculation for ONE employee. What if there are 50 employees in a company? The PCB deductions and exemptions are going to be different for every employee. The smart way to do it is of course to do via a cloud-based HR suite like JustLogin! It’s faster, it’s more accurate, and it’s just easier.
Employers who fail to remit payments before the 15th of the following month are liable to being fined, and the minimum fine would be RM200, up to a maximum of RM20,000 or up to 6 months imprisonment, or both.
Furthermore, wrong calculations can also result in penalties for the employers up to RM200 per employee per month. For example, a company with 10 employees that have been submitting wrong tax calculations for 6 months can be fined up to RM12,000. As calculated below:
RM200/employee x 10 = RM2,000
RM2,000 x 6 months = RM12,000
Hence, it would be prudent for Employees to be very cautious about this and reduce human errors by using automated payroll calculation software like JustLogin to avoid unnecessary penalisation and troubles for your business.
2. Employees Provident Fund (EPF)
EPF is a compulsory savings plan put in place by the Malaysian government and is also a federal statutory body under the purview of the Ministry of Finance. The savings plan is compulsory for Malaysians and is open for foreign workers in the private sector. All monetary payments classified as wages are subject to EPF, such as salaries and bonuses. This does not include overtime payments, travel allowances, retirement benefits, et cetera. For the year 2020, the minimum employee EPF contribution rate is a range from 7% or 11% in which employers can opt to contribute.
Various offences and penalties are associated with noncompliance with the EPF Act 1991 as well as the KWSP 1991 Rules and Regulations. For example, an employer who fails to make a contribution on or before the 15th day of the month may be fined up to RM10,000, imprisoned for up to 3 years, or both. For a more comprehensive list of offenses and penalties, click here!
3. Social Security Organisation (SOCSO)
SOCSO, also known as PERKESO in Bahasa Malaysia, is a government agency that was established to provide social security services to employees. There are 2 schemes under SOCSO: The “Employee Injury and Invalidity Scheme and the ”Employee Injury Scheme” The Employee Injury Scheme provides coverage for workplace accidents, and the Employee Injury and Invalidity Scheme provides coverage to employees who suffer from invalidity or death due to any cause and not related to their employment. SOCSO also applies to non-Malaysian employees, you may refer to the table below to find out more:
The monthly contributions for SOCSO to be made can be calculated manually by using the Contribution Table which you can find right here.
4. Employment Insurance System (EIS)
All employers in the private sector are required to contribute monthly for each of their employees. The EIS was introduced in 2018 as a safety net for workers who have lost their jobs due to retrenchment (especially now during the COVID-19 pandemic) or other similar circumstances. The monthly contributions for both EIS to be made can be calculated manually by using the EIS Contribution Table which you can find right here.
However, just like for the PCB, the EIS and SOCSO contributions can be done more efficiently with JustLogin!
Both EIS and SOCSO contributions are governed under SOCSO, they are the ones that enforce the regulations under the Employees’ Social Security Act 1969 and Employees’ Social Security (General) Regulations 1971.
5. Human Resources Development Fund (HRDF)
Certain employers in the manufacturing, services and transportation sectors contribute to the HRDF in order to develop the technical skills of their employees through training schemes.
The HRD levy payable by the employer amounts to 1% of their employees’ monthly wages (basic salary + fixed allowances apart from travel allowances) for employers with 10 or more Malaysian employees. For companies with 5 – 9 Malaysian employees the rate is 0.5% of monthly wages and registration is not compulsory.
Benefits of the HRDF:
The employers under the scheme are eligible for receiving a grant from the fund to spend on their employee training program. The grants offered by the HRDF are quite capable of handling a major portion of the expenses incurred in organizing such training, if not all. It also provides financial aid to employers who are organizing this training.
Budget 2021 Announcements for Payroll Compliance
As with every year, the Malaysia government has announced new updates for Payroll Compliance for the year 2021 in their Annual Government Budget Allocation announcement. The updates are as follows:
Minimum employee EPF contribution rate reduced from 11% to 9% beginning January 2021 for a period of 12 months
Employees can also opt to maintain 11% by filling up the KWSP 17A (Khas 2021) form that will be provided by their employers. Employers may download it here.
Employers are required to enter the employee’s application online via i-Akaun (Employer). Employers are only allowed to key in starting 14th December 2020.
Employers must keep the completed KWSP 17A (Khas 2021) form as a record.
Human Resource Development Fund (HRDF)
HRDF6-month exemption from the HRDF levies given effective 1 January 2021 to employers in the tourism sector or affected by the COVID-19 crisis.
Income tax reduction for resident individuals reduced by 1 percentage point to 13% for the chargeable income band of RM50,001 to RM70,000.
Special income tax treatment flat rate of 15% for 5 years to non-citizen individuals holding key positions for strategic new investment by companies relocating their operations to Malaysia
For years of assessment 2020 and 2021, income tax exemption limit for compensation for loss of employment increased from RM10,000 to RM20,000.
Medical treatment expenses expanded to cover vaccination expenses for the taxpayer, spouse and child up to an annual limit of RM1,000.
Individual income tax relief of up to RM3,000 on Private Retirement Scheme contributions extended until the year of assessment 2025.
Tax relief limit on medical expenses for self, spouse and child for serious diseases increased from RM6,000 to RM8,000, and tax relief limit for expenses on full medical check-up increased from RM500 to RM1,000.
Scope of relief for tuition fee expanded to cover expenditures incurred for attending up-skilling courses provided by certified bodies up to a limit of RM1,000.
Tax relief on expenses for medical treatment, special needs and parental care increased from RM5,000 to RM8,000.
Additional tax relief for disabled spouses increased from RM3,500 to RM5,000.
Lifestyle tax relief limit increased from RM2,500 to RM3,000,
Tax relief of up to RM8,000 Skim Simpanan Pendidikan Nasional (SSPN) extended until the year of assessment 2022.
Malaysia payroll compliance contribution changes on a yearly basis which may cause certain inconveniences for business owners and HR managers who are not abreast with the latest news updates from the Malaysian government. However, once you’ve adopted HR cloud software like JustLogin to your business processes, you can brush these worries aside as the software solution automatically complies to all these changing regulations, leaving your business more efficiency and allows you to focus on what matters most: growing your business.
Get started on cloud-based HR with JustLogin
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