On 29 December, 2021, Premier Li Keqiang chaired an executive meeting of the State Council where it was decided to continue the implementation of some preferential policies on individual income tax.
In order to reduce the burden of individual income tax and relieve the pressure on low- and middle-income earners, the meeting decided:
- Firstly, the one-time bonus of the whole year will not be incorporated into the salary income of the current month, and the policy of separate monthly taxation will be extended to the end of 2023 (see example of the impact below).
- Secondly, the tax exemption policy of annual income not exceeding RMB 120,000 and requiring tax supplement or annual final tax supplement not exceeding RMB 400 shall be extended to the end of 2023, whereby those meeting the criteria do not need to undertake an annual filing.
- Thirdly, the separate tax policy for equity incentive of listed companies will be extended to the end of 2022. Continued with the current practice that the total equity incentive income applies to annual tax rate table to calculate the tax separately.
The above policies can reduce the tax burden on individuals by an estimated RMB 110 billion a year, among which the first one is the policy of the tax calculation method of annual bonus will change which has attracted great attention in recent years.
This involves the tax on bonus being calculated separately from other income, with the tax calculation formula for annual one-time bonus being:
- Tax payable = annual one-time bonus income * applicable tax rate – quick deduction
Income tax rates
In order to determine the applicable tax rate and quick calculation deduction, the annual one-time bonus income is divided by 12, and then this figure is applied to below table to determine this.
The comprehensive income tax rate after monthly conversion is:
|Level||Total monthly taxable income (RMB)||Tax rate (%)||Quick deduction|
|2||3,000 – 1,200||10||210|
|3||12,000 – 25,000||20||1410|
|4||25,000 – 35,000||25||2660|
|5||35,000 – 55,000||30||4410|
|6||55,000 – 80,000||35||7160|
The individual comprehensive income annual tax rates are:
|Level||The annual amount of taxable income using cumulative wages withholding method (RMB)||Tax rate (%)||Quick deduction|
|2||36,000 – 144,000||10%||2,520|
|3||144,000 – 300,000||20%||16,920|
|4||300,000 – 420,000||25%||31,920|
|5||420,000 – 660,000||30%||52,920|
|6||660,000 – 960,000||35%||85,920|
Based upon the above, the following provide an example of the impact:
Case 1: Mr. John worked in Beijing in 2021 with a monthly gross salary of RMB 9,000, a monthly deduction of RMB 2,028 for monthly social welfare, no other deduction items, and an annual bonus of RMB 30,000.
Scheme 1: Annual bonus is calculated separately under the tax preferential policy.
1) RMB 30000 / 12 = RMB 2500, and according to the tax rate table, it is applicable to the tax rate of 3%, and the quick deduction is 0, and therefore the tax payable is:
- Bonus tax = RMB 30000 * 3% – 0 = RMB 900
2) The annual tax payable of wages and salaries = RMB 9,000 * 12 – 2028 * 12 – 5000 * 12 = RMB 23,664, the corresponding tax rate is 3%, and the quick deduction is 0.
- Payroll tax payable = RMB 23,664 * 3% = RMB 709.92
- Total annual individual income tax = bonus individual tax + annual comprehensive income tax payable = RMB 900 + 709.92 = RMB 1,609.92.
Scheme 2: Annual bonus is incorporated into comprehensive income and no special taxation.
- Annual bonus + annual salary = RMB 9,000*12 + 30000=RMB138,000, taxable income = 138,000 – 2,028 * 12 – 60,000 = RMB 53,664, the corresponding tax rate is 10%, and the quick deduction is 2520.
- Annual tax payable = RMB 53,664 * 10% – 2520 = RMB 2,846.4
Difference between the two tax payment methods = RMB 2,846.4 – 1,609.92 = RMB 1,236.48
After comparison, the impact of the special bonus tax policy is that Mr. John shall pay RMB 1,236.48 less IIT.
Case 2: Mr. Peter worked in Beijing in 2021, with a pre-tax monthly salary of RMB 30,000, a monthly deduction of RMB 6,353.21 for the social welfare, no other deduction items, and an annual bonus of RMB 30,000.
Scheme 1: Annual bonus is calculated separately.
1) 30000 / 12 = 2500 According to the tax rate table, it’s applicable to the tax rate of 3%, and the quick calculation deduction is 0
- Bonus tax = RMB 30000 * 3% – 0 = RMB 900
2) The annual tax payable of wages and salaries = RMB 360,000 – 6,353.21 * 12 – 5,000 * 12 = RMB 223,761.48, the corresponding tax rate is 20%, and the quick deduction is 16,920
- Payroll tax payable = 223761.48 * 20% – 16920 = RMB 27,832.3
Total annual individual income tax = bonus individual tax + annual comprehensive income tax payable = RMB 900 + 27832.3 = RMB 28,732.3
Scheme 2: Annual bonus is incorporated into comprehensive income.
- Annual bonus + salary = RMB 390,000, taxable income = RMB 390000 – 6353.21 * 12 – 60000 = RMB 253,761.48, corresponding tax rate is 20%, quick deduction is 16920.
- Annual tax payable = RMB 253,761.48 * 20% – 16920 = RMB 33,832.3
Difference between the two tax payment methods = RMB 33,832.3 – 28732.3 = RMB 5100
After comparison, the impact of the special bonus policy is that Mr. Peter shall pay RMB 5,100 less IIT.
According to the Circular on Issues Concerning the Connection of Relevant Preferential Policies after the Revision of the Law on Individual Income Tax, employees can enjoy the special tax on bonus before the policy expires by the end of 2023. In order to reduce staff turnover and to encourage staff in their performance, companies can consider their remuneration structure inclusive of bonus provisions.
Offering employees one-time bonuses can also be used to attract outstanding talents and benefit the development of enterprises and employees. Companies should therefore look to review their remuneration structure from a compliance, tax optimisation and best practice perspective.