KWSP and Income Tax
The KWSP (Kumpulan Wang Simpanan Nasional) is a compulsory contribution for Malaysian employees and employers. Although foreigners are not required to contribute KWSP , they can opt to contribute at the same rate as Malaysians. While the employees’ portion of contribution can be deducted as a relief from income for tax calculations, the employers’ portion is a tax-free income to the employees. It is this part of income that we want to concentrate in.
Employees have 11% of their salaries deducted and contribute to the KWSP whereas employers pay 12%. Employers are allowed to contribute up to 7% more than the statutory rate of 12%, i.e. up to 19% under the Income Tax Act for employers to be able to deduct these contributions from the employers’ taxable income. If an employer contributes more than 7% above the statutory rate, the excess is not allowed as a deduction when calculating the employers’ income tax.
An employee can arrange for his/her employer to contribute 19% to KWSP by lowering his/her salary. For example,
Original salary RM10,000 a month, Employer’s KWSP (12%) RM1,200.
Cost of hiring to employer = RM10,000 + RM1,200 = RM11,200
The employee can ask his/her employer to consider paying less basic salary but increase the employer’s contribution to KWSP as follows :-
Adjusted salary RM9,412 a month, Employer’s KWSP (19%) RM1,788
Cost of hiring to employer = RM9,412 + RM1,788 = RM11,200
So there is no difference to the employer, but for the employee, his/her taxable income is RM588 (RM10,000 – RM9,412) less a month, which is RM7,056 a year. If his/her tax bracket is at 27%, the tax saving would be RM1,905.12 a year !
Of course, the employee’s take home pay at the end will be less as well but the difference is credited into the employee’s KWSP account, which belongs to the employee anyway. The additional contribution to the KWSP can be withdrawn for purchasing a house when needed, or as additional retirement fund when he/she retires.
For foreigners, they will be able to withdraw all the money they have in the KWSP when they leave Malaysia, together with all earned dividends, tax-free.