If you received an IRD tax notice in August and were shocked by how large the bill was — you're not alone. Hong Kong's provisional tax system catches most freelancers off guard. This guide explains exactly how it works and how to plan for it year-round.
The key insight: Your August tax bill usually combines two separate tax demands — last year's final tax and next year's provisional tax — into a single notice. Most freelancers only budget for one.
Hong Kong uses a pay-as-you-go system for Profits Tax and Salaries Tax. Because you only file your tax return once a year (typically in April–June), the IRD needs a way to collect tax throughout the year. They do this by charging you an advance payment — called provisional tax — based on the previous year's income.
This means every August, you'll receive a tax demand note that includes:
Combined, this can easily be 1.5x to 2x what you expected to pay.
One of the most common mistakes HK freelancers make is using the wrong tax rate. Here are the actual IRD rates for FY2025/26:
| Business structure | First HK$2,000,000 | Above HK$2,000,000 |
|---|---|---|
| Sole proprietor / Freelancer | 7.5% | 15% |
| Limited company | 8.25% | 16.5% |
Most freelancers incorrectly reserve at 15%, 17%, or even 20% — significantly over-reserving and tying up cash unnecessarily. The effective rate for most HK freelancers earning under HK$2 million is 7.5%.
Provisional tax applies to sole proprietors (unincorporated businesses), freelancers, and independent contractors who file a BIR60 profits tax return. If you operate as a limited company, you pay Corporation Tax under a different schedule.
The standard payment schedule is:
The formula is straightforward:
Example: If you earned HK$600,000 in FY2024/25 with HK$50,000 in allowable deductions, your assessable profits are HK$550,000. At 7.5%, your tax is HK$41,250. Your August notice will likely include this plus ~HK$41,250 provisional tax for FY2025/26 — a total of ~HK$82,500.
Reducing your assessable profits reduces your tax. Common deductions for sole proprietors include:
The best way to handle provisional tax is to reserve throughout the year rather than scrambling in August. Here's what to do:
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Yes. If you expect your income in the current year to be at least 10% lower than the previous year, you can apply to reduce your provisional tax assessment using Form IR1121. This must be filed before the due date on your tax demand note — usually within 28 days.
Contact the IRD immediately. You can apply for an instalment plan. Never ignore a tax demand — penalties and surcharges add up quickly.
Not usually. The IRD cannot charge provisional tax in your first year as there's no prior-year income to base it on. You'll start receiving provisional tax notices in your second year of operation.
Freelancers and sole proprietors pay Profits Tax (7.5%/15%), not Salaries Tax. Salaries Tax applies to employees. If you're transitioning from employment to freelancing, make sure you're filing the correct return (BIR60 for profits tax).