Budget boosts tax relief, with allowances significantly raised; middle-income families could save nearly HK$10,000 in tax.

On 25 February, Financial Secretary Paul Chan Mo-po delivered the 2026-27 Budget. The one-off Salaries Tax concession of $3,000 (effective for the 2025/2026 tax year) was certainly a key highlight, but for sandwich generation families with elderly parents to support and young children to raise, the increase in various allowances starting next year (effective for the 2026/2027 tax year, effective for the 2026/2027 tax year) is even more noteworthy.

The Budget broadly increased a number of allowances. A typical sandwich family (a working couple with two children, supporting two parents) could save $9,520 in tax starting next year.  

This Budget introduces two new measures that directly affect employees’ tax bills. The two are entirely different in nature, so it is important to distinguish between them: 

Permanent increase in allowances (effective from the 2026-27 assessment year, applicable every year thereafter)

The Government has increased a number of personal allowances by around 8-10%, marking one of the larger adjustments in recent years. For families with a spouse, children, and dependent parents, the three allowances will all rise at the same time, with a very noticeable effect. 

 One-off salaries tax reduction (applicable only to the 2025-26 assessment year)

The Government is providing a 100% salaries tax reduction, capped at $3,000 per taxpayer. Dual-income couples may each benefit separately, with a maximum combined benefit of $6,000.

Important note: the one-off tax reduction applies only to the 2025-26 assessment year 

The calculations below are based on a 17% tax rate, reflecting the actual situation for middle- to upper-income employees. The tax savings from the increase in allowances are ongoing each year. 

As can be seen from the table above, the biggest beneficiaries of this Budget are the sandwiched generation. With the married person allowance, child allowance and dependent parent allowance all increased at the same time, the total tax savings for a typical sandwiched family amount to $9,520. 

For many Hong Kong families, there is another long-term, annual tax-saving tool: purchasing Voluntary Health Insurance Scheme and Qualifying Deferred Annuities (tax-deductible annuities).

Voluntary Health Insurance Scheme: HK$8,000 tax deduction per family member per year, with no limit on the number of family members

From the 2019/20 tax year onwards, eligible Hong Kong taxpayers may apply for tax deductions on the “qualifying premiums” paid in that year if they purchase government-approved VHIS recognised products (including Standard Plans or Flexi Plans) for themselves or “specified relatives”. Eligible “specified relatives” generally include spouses, children, parents, grandparents, great-grandparents, siblings, and more. The maximum tax-deductible premium for each insured person is HK$8,000 per year, and there is no limit on the number of insured persons.  

In addition to tax savings, VHIS also provides inpatient coverage. In an environment where medical inflation continues to rise each year, it is an important part of personal medical protection.

Further reading: VHIS Comparison

Qualifying Deferred Annuities: up to HK$60,000 tax deduction per taxpayer per year

At present, the tax deduction cap for Qualifying Deferred Annuities is HK$60,000, which means that if a policyholder takes out a policy and pays HK$60,000 in premiums before 31 March each year, they can still catch the tax season and enjoy tax deductions. Based on a 17% salaries tax rate, the policyholder can save HK$10,200 in tax each year.  

Note: MPF voluntary contributions, VHIS, and Qualifying Deferred Annuities share a combined annual tax deduction cap of HK$68,000 

Annuities are long-term wealth management products, so policyholders need to choose carefully to avoid regretting their decision in future. Below is a summary of the key points readers should note.

• Income period – Annuity products usually have a specified period for benefit payments. Policyholders need to understand when they will need annuity income.
• Internal rate of return (IRR) – IRR can be used as an indicator of returns, calculating the annual return rate of the entire cash flow.
• Ratio of “guaranteed returns” to “non-guaranteed returns” – If an annuity product is purchased for retirement living, many people seeking “stable cash flow” will consider the product’s “guaranteed returns”.
• Early surrender cash value – If a policyholder surrenders the policy in the early years, they may lose most of the premiums paid, so policyholders should ensure they have sufficient liquid cash for emergencies and avoid early surrender.
• Early death benefit - If the policyholder dies before breaking even, the beneficiary may receive a death benefit, either as a lump-sum payment or by continuing to receive the remaining annuity payments.

When choosing tax-deductible annuity products, consumers need to consider their personal financial situation, standard of living and purchase purpose in detail, such as savings, retirement planning, and hedging longevity risk. It is advisable to understand the risks involved, including inflation and early surrender, as well as the premium payment period, guaranteed and non-guaranteed returns, and death benefit protection. If you have any questions, or would like to know more, please do not hesitate to contact 10Life’s insurance consultants via WhatsApp. 

This English version of this article has been generated by machine translation powered by AI. It is provided solely for reference purposes. In the event of any discrepancy or inconsistency between this translation and the original Chinese version, the Chinese version shall prevail.