7 Critical Updates to Hong Kong’s MPF and Severance Payment Rules in 2026

If you run payroll or HR in Hong Kong, you already know the old MPF offsetting rule is gone. Since May 1, 2025, employers can no longer use their mandatory MPF contributions to offset severance payments (SP) or long service payments (LSP). That change is now fully in effect for 2026, and it has shifted the financial risk of employee termination squarely onto the business. The government introduced a transitional subsidy scheme to help, but many HR teams still have questions about how to calculate payments, handle pre and post transition service, and budget for the new costs. This guide covers everything you need to know.

What the MPF Offsetting Abolition Actually Means

Before May 1, 2025, employers in Hong Kong could reduce their severance and long service payment liabilities by deducting mandatory MPF contributions they had already made. If an employee was entitled to HKD 100,000 in severance and the employer had contributed HKD 80,000 in mandatory MPF payments, the employer only paid HKD 20,000 out of pocket.

That practice is now illegal.

The Employment and Retirement Schemes Legislation (Offsetting Arrangement) (Amendment) Bill 2022 ended this arrangement for all service periods starting from May 1, 2025. Service before that date is still subject to the old rules. This split creates two distinct calculation methods that HR teams must manage simultaneously.

How the Pre and Post Transition Split Works

Every employee with continuous service before and after May 1, 2025, has two separate entitlements. The old rules apply to the pre-transition period. The new rules apply to the post-transition period.

Here is how it breaks down:

• Pre-transition service (before May 1, 2025): Employers can still use mandatory MPF contributions to offset severance and LSP liabilities for this period. The offset is capped at the amount of mandatory contributions made during that service period.
• Post-transition service (on or after May 1, 2025): No offsetting allowed. Employers must pay the full severance or LSP amount from their own funds.

This means your payroll team needs to track two separate service periods for every employee hired before May 1, 2025. If you are using an HRIS that does not support this split, you will need to manually calculate each component until your system is updated.

The Government Transitional Subsidy Scheme Explained

To soften the blow for businesses, the Hong Kong government launched a subsidy scheme that covers part of the post-transition severance and LSP costs. Here are the key details:

• The subsidy covers up to HKD 500,000 per employee for post-transition payments.
• It applies only to the portion of severance or LSP that relates to service after May 1, 2025.
• Employers must apply for the subsidy after making the payment to the employee.
• The scheme is designed to help small and medium enterprises, but all employers can apply.

“The subsidy is not automatic. You must submit a claim to the government after you have made the severance or LSP payment. Keep detailed records of every calculation to support your application.” – Hong Kong Labour Department advisory note

Table: Pre vs Post Transition Calculation Example

Component	Pre-Transition (Before 1 May 2025)	Post-Transition (On or After 1 May 2025)
Service period used	Years before 1 May 2025	Years from 1 May 2025 onward
Offsetting allowed?	Yes, using mandatory MPF contributions	No offsetting allowed
Employer pays	Reduced amount after offset	Full amount
Government subsidy	Not applicable	Up to HKD 500,000 per employee
Calculation formula	Same Employment Ordinance formula	Same Employment Ordinance formula

How to Calculate Severance and LSP in 2026

The basic formula for severance and LSP has not changed. It is still based on the employee’s age, length of continuous service, and final rate of pay. The difference is that you now calculate two separate amounts.

Here is the standard formula:

1. For each year of service, calculate one week’s pay for the first 10 years of employment.
2. For each year of service after the 10th year, calculate two weeks’ pay.
3. The maximum service period that can be counted is 20 years.
4. The maximum weekly pay cap is HKD 1,200 (as of 2026, check for annual updates).

Practical Example

An employee aged 45 with 15 years of continuous service is terminated in 2026. Their final rate of pay is HKD 1,500 per week.

• Pre-transition service: 14 years (before 1 May 2025)
• Post-transition service: 1 year (1 May 2025 to termination date)

Pre-transition calculation:
– First 10 years: 10 weeks of pay (10 x HKD 1,200 cap = HKD 12,000)
– Next 4 years: 8 weeks of pay (4 x 2 = 8 weeks, 8 x HKD 1,200 = HKD 9,600)
– Total pre-transition: HKD 21,600 (offsetting may reduce this)

Post-transition calculation:
– 1 year of service: 1 week of pay (1 x HKD 1,200 = HKD 1,200)
– Total post-transition: HKD 1,200 (no offsetting, full amount paid by employer)

The employer pays the post-transition amount in full and can apply for the subsidy on that portion.

5 Critical Updates HR Teams Must Implement Now

The abolition of MPF offsetting is not just a payroll change. It affects your entire termination process. Here is what you need to update in 2026:

1. Update your employment contracts. Review the termination clauses in your standard contracts. Remove any language that references MPF offsetting for future service. Add a clear explanation of how severance and LSP will be calculated for post-transition service.

2. Recalculate your termination budget. If you have long-serving employees, the cost of termination has increased. Run a scenario analysis for your top 10 highest-risk terminations. Know what the cash impact would be before you need to make a decision.

3. Train your HR and payroll teams. Your team must understand the pre and post transition split. Provide them with a step-by-step calculation guide and a checklist for processing terminations. Make sure they know how to submit subsidy claims.

4. Audit your HRIS and payroll software. Check whether your system can handle dual-period calculations. If it cannot, work with your vendor to add this functionality or prepare manual workarounds. This is especially important if you have a large workforce with many long-tenured employees.

5. Communicate the change to leadership. Your CFO and department heads need to know that termination costs have gone up. Present the data from your scenario analysis and recommend a budget adjustment for the current fiscal year.

Common Mistakes Employers Are Making in 2026

Even with the change being over a year old, we see the same errors repeating. Here are the most common ones:

• Mistake 1: Applying the new rules to pre-transition service. Some payroll teams have stopped offsetting entirely, even for service before May 1, 2025. This is incorrect. The old rules still apply to that period.
• Mistake 2: Forgetting the weekly pay cap. The HKD 1,200 weekly cap applies to both pre and post transition calculations. Do not use the employee’s actual weekly pay if it exceeds the cap.
• Mistake 3: Missing the subsidy deadline. The government subsidy has a time limit for claims. Missing it means the employer bears the full cost. Set up a calendar reminder for every termination.
• Mistake 4: Not tracking voluntary MPF contributions separately. Voluntary contributions were never subject to offsetting. Some employers accidentally include them in their calculations, which can lead to underpayment of severance.

A 3-Step Process for Handling a Termination in 2026

When an employee is terminated, follow this process to ensure compliance:

1. Calculate the total severance or LSP entitlement. Use the formula described above. Split the calculation into pre and post transition periods. Document every step.

2. Apply the offset for pre-transition service only. Subtract the mandatory MPF contributions made during the pre-transition period from the pre-transition entitlement. Record the remaining balance.

3. Pay the post-transition amount in full and submit the subsidy claim. Make the payment to the employee within the statutory timeframe. Then submit your subsidy application to the government. Keep copies of all calculations and payment records.

Budgeting for the New Reality

The biggest shift for 2026 is financial. Employers must now treat severance and LSP as a direct cash cost, not a paper adjustment against MPF contributions. This has implications for cash flow, especially for SMEs with limited reserves.

Consider these budgeting strategies:

• Set aside a termination reserve each quarter based on your employee headcount and average tenure.
• Factor the increased cost into your annual HR budget planning.
• Review your MPF contribution strategy. Some employers are increasing voluntary contributions as a retention tool, but remember that voluntary contributions cannot offset severance.
• If you are a startup or growing company, factor termination costs into your hiring decisions. The cost of letting someone go has gone up.

How This Connects to Your Broader HR Strategy

The MPF offsetting abolition is part of a larger shift in Hong Kong employment law toward stronger employee protections. We have seen similar changes in paternity leave, anti-discrimination rules, and data privacy requirements. HR teams that stay ahead of these changes build more trust with their workforce.

For more on how to align your employment contracts with the latest MPF rules, read our guide on are your employment contracts compliant with Hong Kong’s latest MPF and mandatory provident fund changes. If you are dealing with a termination right now, our article on 5 common termination mistakes that could cost your Hong Kong business millions can help you avoid costly errors.

Your Action Plan for the Rest of 2026

The rules are clear. The calculations are manageable. The risk is in doing nothing.

Here is your checklist for the next 30 days:

• Run a termination cost scenario for your top 10 longest-serving employees.
• Update your employment contract templates for new hires.
• Train your payroll team on the pre and post transition split.
• Set up a subsidy claim tracking system.
• Review your HRIS capabilities and plan for any needed upgrades.

The MPF offsetting abolition is not going away. The sooner you integrate it into your standard processes, the less stress you will face when the next termination comes up. Take it one step at a time, and lean on your payroll provider or legal counsel if you need help with the calculations. You have got this.