Are you paying too much tax on your bonus?

In a period of transition between tax laws, Chinese taxpayers can decide which tax policy to use for their annual bonus, writes Valur Blomsterberg of accounting firm Integra Group

It’s been a year since changes to Individual Income Tax (IIT) came into effect in January 2019, and tax brackets and a host of other changes to the country’s individual taxation system were introduced.

Amongst the new provisions was the comprehensive income tax policy for calculating annual bonuses. This will eventually replace the one-time preferential tax treatment that has been in effect since 2005.

Choosing the most beneficial system during this transition period can be tricky, as the potential advantages of each policy are broadly based on individual circumstances

However, China’s taxpayers still have until December 31^st, 2021 to temporarily opt-out of the new system and can continue using the preferential tax treatment for annual bonuses for the next two years. Choosing the most beneficial system during this transition period can be tricky, as the potential advantages of each policy are broadly based on individual circumstances.

If adhering to the comprehensive income tax policy, year-end bonuses will have to be included into comprehensive income calculations. Taxes are then applied at the same progressive rate as salaries, as indicated in the following table:

On the other hand, the one-time preferential tax treatment allows annual bonuses to be calculated separately from salaries. The one-time annual bonus is divided by 12, and the applicable tax rate is calculated according to the below tax table:

This system can be applied only once a year, and other performance bonuses will be taxed together with salaries.

As several factors influence the annual taxable income, such as the distribution of income between salary and bonuses, as well as deductible expenses, it is not always beneficial to opt for the comprehensive income tax policy.

Before making a decision, taxpayers should be especially aware that those who choose to switch immediately to the comprehensive income tax policy will not be allowed to go back to the one-time preferential tax treatment.

However, after Dec 31^st, 2021, all China’s taxpayers will have to adhere to the new policy, no matter what system they had opted for during the transition period.

The annual bonus tax calculator can be a useful tool to determine whether to switch to the comprehensive income tax policy immediately. Seeking the help of a tax professional is also a sensible option, as they may help tailor the choice to each person’s individual circumstances.