On 31 August 2023 the State Council issued the Notice on Raising the Standards for Special Additional Deductions under Individual Income Tax (Guofa No. 13 of 2023). Three standards were raised: childcare for children under three from RMB 1,000 to RMB 2,000 per child per month; children’s education from RMB 1,000 to RMB 2,000 per child per month; and elderly care from RMB 2,000 to RMB 3,000 per month. The new standards apply from 1 January 2023.
For employers and employees this is not merely news. It directly affects payroll from September, withholding filings and the annual settlement for 2023.
First point: switching the filing period
Withholding agents must calculate IIT under the new standards in the September filing period. Because the increase is retroactive to 1 January, the first eight months were deducted at the old standards, creating a difference in later months. Systems usually recalculate cumulative deductions automatically, but employers should still check that cumulative special deductions in payroll reflect the new standards.
For employees who left between January and August, the difference is handled through annual settlement rather than a supplemental deduction by the former employer. Employers should retain records so they can explain the position if asked.
Second point: information collection and updates
Special deductions depend on employee declarations. After the increase, employees do not need to re-file, but employers should prompt them to verify childcare, children’s education and elderly care information, particularly where the number of children, education stage, elder identity or allocation method has changed.
For employees with multiple children, the deduction is calculated per child, not per household. For elderly care, the method differs for only children and those with siblings; siblings must agree an allocation or have it designated by the supported elder, with a written allocation agreement retained.
Third point: evidence and responsibility
Special deductions operate on a “declare to enjoy, retain for inspection” basis. The employer is not the final auditor of the information, but as withholding agent it must still withhold correctly. Where an employee falsely declares, the tax authority will recover tax, charge late fees and may impose penalties; an employer that knowingly assists may also bear responsibility.
Employers should therefore maintain basic prompts and records: tell employees to declare truthfully, retain submitted information, periodically prompt changes, and require correction where anomalies are obvious.
Effect on foreign employees
Foreign employees may choose special additional deductions or tax-exempt benefits such as housing subsidies, language training and children’s education, but not both. After the increase, some may need to reassess which is more favourable. Employers should provide clear calculations at the annual election rather than applying a default.
For IIT and withholding, see our tax compliance service; for payroll and employment arrangements, see employment compliance; for ongoing HR and tax support, see annual legal counsel.
This article is based on the Notice on Raising the Standards for Special Additional Deductions under Individual Income Tax issued by the State Council on 31 August 2023. It is for reference only and does not constitute legal advice.