MPF Offsetting Abolition: Employer Guide to SP and LSP Costs

Since 1 May 2025, employers cannot use mandatory MPF contributions to offset the part of a severance or long service payment earned from that date. Service before it is grandfathered and can still be offset. Each payment is split in two and calculated as 2/3 of monthly wages (capped at HK$15,000) × years of service, up to HK$390,000 in total. A 25-year Government subsidy covers most of the post-transition cost: until 30 April 2027 an employer pays at most HK$3,000 per case within its first HK$500,000.

Last reviewed: September 2026 · Sources: Labour Department, Subsidy Scheme for Abolition of MPF Offsetting Arrangement, MPFA

What changed on 1 May 2025

Before the abolition, an employer could draw on the accrued benefits from its MPF contributions, mandatory and voluntary, to pay an SP or LSP. For many SMEs this meant a dismissal cost little or no extra cash. The Labour Department's overview of the abolition sets out the new position, which applies to any employment ending on or after 1 May 2025, "the transition date".

The change has no retrospective effect. What an employer can still use depends on the source of the money:

Employees outside the MPF system or another statutory retirement scheme are unaffected, because there was never anything to offset. They include domestic helpers, employees under 18, and people who started a job at 65 or over. Their SP or LSP is calculated for the whole period of employment in the usual way.

Who is entitled to SP or LSP

Eligibility is unchanged by the abolition. The Labour Department's Concise Guide, chapter 11 sets it out.

• Severance payment: at least 24 months under a continuous contract, and dismissal by reason of redundancy, a fixed-term contract expiring unrenewed because of redundancy, or lay-off.
• Long service payment: at least 5 years under a continuous contract, and one of the following:
• dismissal for a reason other than redundancy or summary dismissal for serious misconduct
• a fixed-term contract expiring unrenewed
• death
• resignation on certified grounds of ill health
• resignation at age 65 or over

An employee cannot receive both. From 18 January 2026, "continuous contract" means at least 4 weeks with 17 hours in each week or, for a shorter week, 68 hours across that week and the 3 before it. Our first-employee checklist covers that test.

How the two portions are calculated

For a monthly-paid employee whose employment straddles 1 May 2025:

• Pre-transition portion = last full month's wages immediately before 1 May 2025 × 2/3 × years of service before 1 May 2025
• Post-transition portion = last full month's wages before termination × 2/3 × years of service from 1 May 2025

Four rules then apply:

1. Monthly cap: the "wages × 2/3" figure cannot exceed 2/3 of HK$22,500, which is HK$15,000. This applies separately to each portion.
2. Employee's election: for either portion, the employee may choose their average wages over the 12 months immediately before the relevant date instead. That is 1 May 2025 for the pre-transition portion and the termination date for the post-transition portion. Expect employees to elect the higher figure where pay includes commission or fluctuating overtime.
3. Pro rata: incomplete years count proportionately.
4. Overall cap: the two portions together cannot exceed HK$390,000. Any excess comes off the post-transition portion, which protects the grandfathered part.

Daily-rated and piece-rated employees use any 18 days' wages the employee chooses from their last 30 normal working days, in place of the monthly figure.

Worked example: a long service payment in October 2026

Ms Chan joined on 1 May 2015. She is dismissed, not for redundancy or misconduct, with employment ending on 31 October 2026. Her last full month's pay before 1 May 2025 was HK$20,000, and her last full month's pay before termination is HK$21,000.

Step 1: service in each period

• Before 1 May 2025: 1 May 2015 to 30 April 2025 = 10 years
• From 1 May 2025: 1 May 2025 to 31 October 2026 = 18 months = 1.5 years

Step 2: pre-transition portion

• HK$20,000 × 2/3 = HK$13,333 (below the HK$15,000 cap)
• HK$13,333 × 10 = HK$133,333

Step 3: post-transition portion

• HK$21,000 × 2/3 = HK$14,000 (below the cap)
• HK$14,000 × 1.5 = HK$21,000

Step 4: total LSP = HK$133,333 + HK$21,000 = HK$154,333, well under HK$390,000.

Step 5: offsetting. Suppose, for illustration, that the accrued benefits from the employer's mandatory contributions in Ms Chan's MPF account are HK$150,000, and there are no voluntary contributions. The employer can use HK$133,333 of that to cover the pre-transition portion in full. The remaining HK$16,667 stays with Ms Chan. The HK$21,000 post-transition portion must be paid in cash.

Step 6: the Government subsidy. The payment falls in subsidy year 2. If it is the employer's first case of the year, it sits within the first HK$500,000, and the employer's share is 50% or HK$3,000, whichever is lower.

• 50% × HK$21,000 = HK$10,500, so the HK$3,000 cap applies
• Subsidy = HK$21,000 − HK$3,000 = HK$18,000

The employer pays Ms Chan HK$21,000 within 7 days, then claims HK$18,000 back. Its net cash cost for the post-transition portion is HK$3,000.

When the caps bite

For a manager earning HK$45,000 a month, 2/3 of pay is HK$30,000, so the HK$15,000 cap applies. Ten years before the transition gives a pre-transition portion of HK$15,000 × 10 = HK$150,000.

The overall cap matters only for very long service. In the Labour Department's own illustration, 20 years before the transition at the capped wage gives HK$300,000 pre-transition. The post-transition portion is then limited to HK$90,000, bringing the total to HK$390,000.

The Government subsidy: 25 years, tapering

The Subsidy Scheme for Abolition of MPF Offsetting Arrangement runs for 25 years from 1 May 2025. Subsidy years run from 1 May to 30 April, so year 2 runs from 1 May 2026 to 30 April 2027.

The subsidy covers only the post-transition portion. The employer pays the SP or LSP in full under the Employment Ordinance first, then applies. The tables below show the employer's share per case.

The HK$500,000 threshold is cumulative: it counts the post-transition SP and LSP paid by the employer in the same subsidy year. A case that straddles it is split pro rata, and so is the capped amount. The Labour Department FAQ works through an employer that has paid HK$470,000 in year 3 and then faces a HK$40,000 case:

• HK$30,000 falls within the threshold. The cap becomes HK$3,000 × 30,000 ÷ 40,000 = HK$2,250.
• HK$10,000 falls beyond it, at a 50% employer share, so HK$5,000.
• The employer pays HK$7,250 of the HK$40,000; the subsidy covers HK$32,750.

The scheme's online calculator runs the same arithmetic for a given case. The subsidy does not cover employees outside the MPF system, and organisations whose SP and LSP costs are fully Government-funded cannot apply.

Keeping the numbers straight. JetFlow's HR module holds payroll history, MPF and leave against each employee record, so the wages for any month, and a 12-month average, are there when a termination calculation needs them. See how JetFlow handles payroll.

Payment deadlines and penalties

The abolition did not change when SP and LSP must be paid.

• LSP: within 7 days of termination. Wilful failure without reasonable excuse carries a fine of HK$350,000 and 3 years' imprisonment.
• SP: the employee serves written notice within 3 months of the dismissal or lay-off. The employer pays within 2 months of receiving it. Failure carries a fine of HK$50,000.

On any termination you must also notify the IRD on an IR56F not later than 1 month before the employment ends. Our employer's return guide covers that form.

Employer to-do list

1. Preserve the transition-date wages. For every employee who joined before 1 May 2025, keep the wage record for the 12 months to 30 April 2025. The Labour Department requires these to be kept until 6 months after the employee leaves, well beyond the usual 12-month rolling window.
2. Tag who is out of scope. Domestic helpers, under-18s and people who started at 65 or over are calculated the old way and attract no subsidy.
3. Know your MPF balances by type. Ask the trustee for each employee's accrued benefits split between employer mandatory and employer voluntary contributions; our eMPF Platform checklist covers where scheme administration now sits. Voluntary balances can still offset both portions.
4. Provide for the post-transition liability. It builds up for every covered employee and becomes payable once they qualify at 24 months (SP) or 5 years (LSP). A rough figure per employee is 2/3 of monthly pay (capped at HK$15,000) × years since 1 May 2025.
5. Pay first, then claim. Keep payment proof and the calculation for each case, and track your running post-transition total against HK$500,000 for the subsidy year.
6. Rewrite the termination checklist. The old habit of "the MPF covers it" now understates cash needs. Update templates, approvals and board papers accordingly.

Common mistakes

• Offsetting the whole LSP from MPF. Mandatory contributions may only cover the pre-transition portion. Offsetting more is an underpayment.
• Losing the April 2025 wage data. Without the transition-date wages and the 12-month average, you cannot calculate the pre-transition portion. The employee's election may lead to a higher figure than you expect.
• Applying the wage cap to the total. The HK$15,000 cap applies to the monthly figure in each portion. The HK$390,000 cap applies to the combined sum.
• Waiting for the subsidy before paying. The subsidy is paid after the employer has paid in full. Paying late to wait for it risks the LSP and SP offences.
• Forgetting employer voluntary contributions. If your scheme has employer voluntary contributions or a length-of-service gratuity, they can still be offset against either portion.

Frequently asked questions

Can employers still use MPF to offset long service payment?

Partly. Accrued benefits from the employer's mandatory contributions can offset only the pre-transition portion, meaning service before 1 May 2025. Voluntary contributions and length-of-service gratuities can offset both portions.

How is the pre-transition portion of LSP calculated?

Take the last full month's wages before 1 May 2025, multiply by 2/3 (capped at HK$15,000), and multiply by the years of service before that date. The employee may instead elect the average wages over the 12 months before 1 May 2025.

How much is the Government subsidy for LSP in 2026?

For payments made from 1 May 2026 to 30 April 2027, subsidy year 2, the employer bears 50% of the post-transition portion or HK$3,000, whichever is lower, for cases within its first HK$500,000 in the year. The Government covers the rest. Beyond HK$500,000, the employer's share is 50%.

What is the maximum long service payment in Hong Kong?

HK$390,000 for the pre- and post-transition portions combined. If the sum exceeds it, the excess is deducted from the post-transition portion.

Does the abolition apply to employees who joined after 1 May 2025?

Yes, fully. Their whole SP or LSP is post-transition, so none of it can be offset by employer mandatory contributions. The subsidy scheme applies to those payments.

Key takeaways

• From 1 May 2025, employer mandatory MPF contributions offset only the pre-transition portion of SP and LSP.
• Each portion is 2/3 of the relevant month's wages, capped at HK$15,000, × years of service. The total is capped at HK$390,000.
• Keep the wage records for the 12 months to 30 April 2025 until 6 months after each affected employee leaves.
• In subsidy year 2, to 30 April 2027, an employer's cost per case within its first HK$500,000 is at most HK$3,000.
• LSP is due within 7 days of termination, and SP within 2 months of the employee's notice. The subsidy is claimed afterwards.

The abolition turns SP and LSP from an MPF balance-sheet item into a cash cost that grows every month. Keeping clean wage history and MPF data per employee is what makes the calculation defensible. To keep that history in one place, start free with JetFlow.

This article is general information, not legal or tax advice; check individual cases with the Labour Department or a qualified adviser.