MPF Offsetting Abolition (2025): What It Means for Severance and Long Service Payment

Key facts at a glance

Transition date

1 May 2025

Applies to employment ending on/after this date

Post-transition offsetting

Abolished

Mandatory MPF can no longer offset

Pre-transition offsetting

Unchanged

Still offsettable against accrued mandatory MPF

Here is the answer before the mechanics: from 1 May 2025, employers in Hong Kong can no longer use their MANDATORY MPF contributions to offset the Severance Pay (SP) or Long Service Payment (LSP) they owe a departing employee, but only for the part of that employee's service from that date onward. Service before 1 May 2025 is unaffected, employers can still offset that portion against accrued mandatory MPF exactly as before. This means most employees now see their SP/LSP entitlement split into two portions, calculated separately.

This isn't a change to the SP/LSP formula itself, the 2/3 x monthly wages x years of service calculation, the HK$22,500/month wage cap, and the HK$390,000 total cap are all unchanged. It's a change to how much of that entitlement an employer can claw back using money they already put into your MPF account. For employees, it generally means more cash in hand on redundancy or a qualifying resignation/retirement. For employers, it means a real new cost line that used to be substantially absorbed by contributions already being made.

Work out your own two-portion SP/LSP breakdown.

Open the Severance / LSP Calculator

How the two-portion calculation actually works

For anyone whose employment ends on or after the transition date, the Labour Department's rules split the SP/LSP calculation into two independent pieces:

1. Pre-transition portion. Years of service before 1 May 2025, x your last full month's wages immediately before 1 May 2025 (capped at HK$22,500), x 2/3. This portion can still be offset by the accrued benefits from your employer's mandatory MPF contributions.

2. Post-transition portion. Years of service from 1 May 2025 onward, x your final monthly wages at termination (capped at HK$22,500), x 2/3. This portion cannot be offset by mandatory employer MPF at all, your employer must pay it in cash, in full.

Both portions are then subject to the overall HK$390,000 statutory ceiling, if the combined pre- and post-transition gross entitlement exceeds that cap, both portions are scaled down proportionately so the total doesn't exceed it.

Worked example: 8 years of service, redundancy in 2026

An employee made redundant with 8 years of total service, 6 years before the transition date and 2 years after, on a monthly wage of HK$22,000 before May 2025 rising to HK$25,000 at termination, with HK$70,000 of accrued employer mandatory MPF contributions:

Portion	Gross entitlement	Offset by mandatory MPF	Payable in cash
Pre-transition (6 yrs)	HK$88,000	-HK$70,000	HK$18,000
Post-transition (2 yrs)	HK$30,000	HK$0 (not allowed)	HK$30,000
Total	HK$118,000	-HK$70,000	HK$48,000

Before 1 May 2025, an employer with enough accrued mandatory MPF could have offset the entire entitlement. Now the post-transition portion, HK$30,000 in this example, is guaranteed cash regardless of how much MPF has accrued. Model your own years, wages, and accrued MPF on the Severance / LSP Calculator.

Employers: this is a new, largely un-offset cost line

Every year of service an employee accrues from 1 May 2025 onward now carries a severance/LSP liability that mandatory MPF contributions can't reduce at all. That's a genuine change to the true cost of keeping someone on payroll long-term, on top of the mandatory 5% employer MPF contribution itself. The Labour Department's Subsidy Scheme for Abolition of MPF Offsetting (SSA) helps share some of this cost for 25 years from the transition date, but it doesn't remove the exposure. See the full cost stack on our Employer Cost of Hiring Calculator.

Voluntary contributions and gratuities still offset, either portion

The abolition only touches MANDATORY employer MPF contributions. Accrued benefits from voluntary employer contributions, and gratuities already paid to an employee based on years of service, can still offset SP/LSP for both the pre- and post-transition portions, exactly as they could before 1 May 2025. Some employers structure retention packages around this distinction.

Work out your exact SP/LSP entitlement

Enter your years of service, wages before and after the transition date, and accrued mandatory MPF to see your two-portion breakdown.

Open the Severance / LSP Calculator

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Frequently asked questions

What exactly is the MPF offsetting abolition?

Before 1 May 2025, an employer who owed a departing employee severance pay or long service payment (SP/LSP) could use the accrued benefits from their own MANDATORY MPF contributions to that employee to offset (reduce) the amount they had to pay in cash. From 1 May 2025 onward, that offsetting is abolished for the portion of an employee's service from that date forward. It doesn't remove SP/LSP itself, and it doesn't touch mandatory MPF contributions going into your account, it just stops employers from clawing back mandatory MPF to cover their SP/LSP bill for future service.

Does the abolition apply to everyone, or only new hires?

It applies to everyone whose employment ends on or after 1 May 2025, the 'transition date', regardless of when they started working. Long-tenured employees are simply split into two portions: years of service before the transition date (still offsettable) and years of service from the transition date onward (not offsettable). There's no grandfathering that exempts existing employees from the post-transition rule.

Which wage figure applies to each portion?

The pre-transition portion uses your last full month's wages immediately before 1 May 2025, frozen at that point, not your final salary. The post-transition portion uses your actual final monthly wages at termination. If you were promoted or got a raise after May 2025, only the post-transition portion reflects it, the pre-transition portion is locked to your pre-2025 wage.

Can employers still offset with voluntary MPF contributions or gratuities?

Yes. The abolition only removes offsetting rights over accrued benefits from MANDATORY employer MPF contributions, for post-transition service. Accrued benefits from voluntary employer contributions, and gratuities already paid to the employee based on years of service, can still offset SP/LSP, for both the pre- and post-transition portions, exactly as before.

Is there a cap on severance pay or long service payment?

Yes, unchanged by the abolition. The wage used in the 2/3 x wage x years-of-service formula is capped at HK$22,500/month, and the total SP/LSP payment is capped at HK$390,000, regardless of actual salary or years of service.

Is there any government support for employers with this new cost?

Yes. The Labour Department runs a Subsidy Scheme for Abolition of MPF Offsetting (SSA), sharing out employers' SP/LSP expenses attributable to employment on or after 1 May 2025, with subsidies running for 25 years from the transition date. It's an employer-side government subsidy, not something that changes an employee's entitlement calculation.

Is severance pay or long service payment taxable?

No. Statutory SP/LSP, calculated strictly under the Employment Ordinance formula and within the statutory caps, is not chargeable to Salaries Tax.