• Deep-separation: how can you understand your salary scale and your tax calculation?
In working life, knowledge of their remuneration structure is not only a basis for safeguarding their own rights and interests, but also a prerequisite for sound financial planning. The personal income tax system in China is streamlined and optimized, and the current system of calculation reflects both equity and the full consideration of family burdens.
What is the “five-risk-one-dollar”?
The “Five Risks One” are social security benefits that enterprises are required to pay to employees:
- Pension insurance: The contribution rate is 8% for individuals and depends on local policies.
- Medical insurance: Individuals usually pay around 2 per cent for medical claims and establish personal medical accounts.
- Unemployment insurance: The individual contribution rate is extremely low (usually 0.5 per cent) and is paid unemployment benefit when unemployed.
- Insurance for industrial injuries and maternity: These are paid exclusively by the enterprise and are not covered by the individual.
- Housing Provident Fund: The percentage is between 5 and 12 per cent, paid equally by employees and enterprises, and can be used to purchase loans or to withdraw to pay rent.
2. Logic in calculating personal income tax
The current tax calculation follows: Taxable = pre-tax salary - Personal portion of the five-risk one-dollar benefit - starting point ($5,000) - special deductions 。
The special deductions are the most significant tax relief initiatives in recent years, covering:
- Children ' s education: The flat amount of $2,000 per month is deducted for each child.
- Housing loans/rents: The monthly deduction is $1,500-2000, depending on the city level.
- Support for elderly persons: Taxpayers support parents over 60 years of age, with a maximum deduction of $3,000 per month.
- Continuing education, medical treatment, etc. The tax burden in specific cases has been further reduced.
Why is there so much difference between “pay at hand” and “pay at the pre-tax level”?
It is clear from our visualized strip map that the loss of remuneration is concentrated in the five-risk dollar. Although this part reduces your purchasing power immediately, in practice the Provident Fund is fully entered into your account (and the company has an equivalent amount deposited), while the Social Security provides a long-term risk hedge. Real tax (taxes) plus special deductions have fallen to very low levels for low- and middle-income groups.
Rational planning to promote “happiness”
It is recommended that you fill in the special deduction on the “personal income tax” app at the beginning of each year. Use these policies rationally, and save you hundreds or even KiloCell of dollars of cash every month. Use this tool to simulate it, which will help you to predict the real economic benefits more accurately when you enter a new company or apply for a salary adjustment.