The payment in lieu of notice paid by the employer to the employee is compensation for loss of work due to the employee’s own fault. Payment in lieu of notice is income obtained in accordance with the terms of the employment contract, so it is subject to salaries tax. The payment in lieu of notice is accrued on the day when the employer’s commitment to pay the payment becomes an unconditional commitment or the employment relationship is terminated, whichever is earlier.

Since payment in lieu of notice must be taxed, employers are responsible for reporting the payment in the appropriate salary and pension tax return IR56B (payment of salary)/IR56F (cessation of employment)/IR56G (departure from Hong Kong). Employers must carefully determine the date when the payment in lieu of notice will accrue. If the tax bureau finds that the date is incorrect, the employer may be punished.

As for the payment in lieu of notice to the employer due to early resignation, the employee cannot be deducted because it is not a complete, pure and necessary expenditure incurred to generate income.

The above information is for reference only. If in doubt, we welcome your tax inquiries

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