Introduction
Malaysia’s diverse employment landscape is characterised by multinational corporations, small and medium-sized enterprises, and government agencies. This dynamic environment necessitates a comprehensive understanding of the types of allowances for employees and their associated tax implications.
According to a report in OpenDOSM, with over 16 million workers in the Malaysian labour force, learning about the types of allowances for employees will be a key factor in ensuring compliance with tax laws and fair treatment at the workplace.
This article aims to provide a clear and concise overview of the various types of allowance for employees in Malaysia and their tax implications. Let’s get started.
1. Overview of Employee Allowances
Employee allowances are additional benefits provided to employees beyond their base salary. These benefits can be categorised into two main types: fixed and reimbursable. The former are provided as a set amount, while the latter are intended to cover specific expenses related to the employee’s job duties.
That being said, it is essential to distinguish between salary and allowance to protect interests. The former is the base pay, which employees receive at regular intervals. Contrarily, supplementary payments or allowances are reimbursed for incurring job-related expenses.
There are numerous types of allowances for employees in Malaysia, and some of them include meal allowances, entertainment allowances, overtime allowances, and more.
Providing these extra benefits makes the company lucrative to top talents and portrays the care for their employees. With better candidates, ultimately, the organisation’s performance will be boosted.
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2. Types of Allowances for Employees in Malaysia
Although there are various types of allowances, generally, they are classified into three categories.
2.1. Fixed Allowances
The type of employee compensation provides a predetermined amount to cover specific expenses related to their job or personal well-being. Fixed allowances are typically paid regularly and can be monthly or weekly. They are generally not tied to the employee’s performance or the company’s profitability. Here is what you can expect under such perks.
2.1.1. Housing Allowance
These are a common component of employee compensation packages in Malaysia. Housing allowances are provided to help employees offset the cost of living, particularly in posh areas. They can be allowed in various forms, such as a fixed monthly amount or a percentage of the employee’s basic salary. Although they are generally taxable as a part of the worker’s income, they can be exempt under certain conditions.
Purpose: To support employees with housing costs.
Common Practices:
- Fixed amount: A set amount provided monthly or annually.
- Percentage of salary: A percentage of the employee’s basic salary.
- Location-based: Allowance varies based on the cost of living in the employee’s location.
2.1.2. Transport Allowance
Among the various types of allowances, the transport allowance is a crucial one in offsetting the cost of commuting to and from work. The type of allowance offered will depend on the company policy and the nature of the employee’s job. However, it is essential to note that the benefit will vary depending on specific circumstances.
Types:
- Fixed amount: A set amount for transportation costs.
- Mileage rate: A rate per kilometre travelled for the personal use of a vehicle.
- Public transport pass: Reimbursement for public transport passes.
Usage:
- Manufacturing: Employees commuting to factories.
- Sales: Employees travelling to client sites.
- Healthcare: Doctors and nurses travelling to hospitals or patient homes.
2.1.3. Meal Allowance
It is generally provided to cover the cost of refreshments and meals during working hours. Meal allowance can be excluded from the tax exemption in Malaysia as long as the amount is reasonable. Moreover, it is provided regularly at the same rate to be exempted from taxation.
- Purpose: To subsidise meal expenses.
- Situations:
- Shift work: Employees working long or irregular hours.
- Remote work: Employees working from home.
- Fieldwork: Employees working in remote locations.
2.1.4. Entertainment Allowance
The entertainment allowance is crucial in covering client entertainment and networking expenses. They can be used for various purposes, such as client dinners, business lunches, or attending industry events.
However, the tax treatment of entertainment allowances can vary greatly depending on specific circumstances. Generally, they can be deductible for employers if they can demonstrate that the expenses are directly related to business activities and have been incurred to generate income.
- Purpose: To facilitate client entertainment and professional networking.
- Prevalence: Common in sales, marketing, and hospitality sectors.
2.2 Variable Allowances
As one of the prominent types of allowances in Malaysia, they offer additional benefits that fluctuate depending on certain factors. It can vastly improve the company’s financial performance, specific working conditions, etc.
2.2.1. Overtime Allowance
It is generally provided to employees who work beyond the regular working hours. Overtime allowance is typically calculated at a premium rate, usually 1.5 to 2 times the employee’s regular hourly wage. Although this premium rate is intended to compensate employees for the additional effort, the allowance will greatly depend on the company policy.
- Purpose: To compensate for extra hours worked.
- Calculation: Usually 1.5 to 2 times the regular hourly rate.
- Regulations: Adherence to labour laws and minimum wage requirements.
2.2.2. Shift Allowance
For the dedicated employees who work ships outside of regular business hours, these types of allowances are compensated. It is generally provided to reimburse the inconvenience and challenges associated with working during nonstandard hours. It is common in industries that require round-the-clock operations, such as healthcare manufacturing and security.
- Purpose: To provide additional pay for shift work.
- Common Sectors: Healthcare, manufacturing, and security.
2.2.3. Hazard Allowance
This is a type of allowance for employees in Malaysia that is intended to offset the increased risk associated with hazardous jobs. Apart from providing additional financial security, they compensate for the willingness of the employee to go the extra step to serve the company. Examples of industries where hazard allowance might be applicable include construction, mining, chemical manufacturing, etc.
- Purpose: To compensate for hazardous working conditions.
- Industries: Construction, mining, chemical manufacturing.
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2.3. Reimbursable Allowances
Contrasting with other types of allowances, reimbursement allowance in Malaysia is an employee benefit that provides financial compensation for specific expenses sustained in relation to job duties. The goal of such allowances is to help employees offset costs associated with their work, thereby taking a load off their shoulders and improving job satisfaction. Here is what a Malaysian employee can expect.
2.3.1. Travel Allowance
Employees frequently travelling for work are entitled to such allowances to cover their expenses. It includes airfare, accommodation, transportation, and daily meal allowance or incidental costs. The specific amount allotted and the eligibility criteria will vary depending on the company policies and the nature of the employee’s job.
- Purpose: To reimburse business travel expenses.
- Reimbursement: Typically includes airfare, accommodation, and transportation.
- Corporate Policy: Companies often have specific travel policies detailing allowable expenses.
2.3.2. Medical Allowance
Medical allowance is a common component of employee compensation packages in Malaysia. They are provided to workers to help with medical expenses such as doctor visits, medication hospitalisation, dental treatments, and more. To make things convenient, they are offered in various forms, including fixed amounts, reimbursement of actual expenses, and contributions to health insurance premiums.
- Purpose: To cover medical expenses.
- Practices: Reimbursement for medical bills and contribution to health insurance premiums.
2.3.3. Education Allowance
These are common types of allowances Malaysian employers offer to support their employees in professional development. Such benefits can be used to cover expenses related to various educational endeavours, such as tuition fees, exam fees, and course materials. Although the reimbursement and eligibility criteria will depend on the company policy, approaching your employer to ask about such opportunities is never a bad idea. Thankfully, as the education allowance is tax-free, we are an attractive component of the compensation package.
- Purpose: To support educational expenses.
- Applications: Tuition fees for further studies, professional certifications, and course materials.
Here is an overview of the types of allowances you can expect for employees in Malaysia.
| Types of Allowances | Subdivisions | Importance |
| Fixed Allowances | Housing Allowance Transport Allowance Meal Allowance Entertainment Allowance | Benefits for Employees: Financial Stability Reduced Financial Burden Improved Work-Life Balance Tax Benefits Benefits for Employers: Attracting and Retaining Talent Increased Employee Satisfaction Reduced Turnover Enhanced Company Reputation |
| Variable Allowances | Overtime Allowance Shift Allowance Hazard Allowance | Benefits for Employees: Increased Earnings Motivation Flexibility Recognition Benefits for Employers: Cost-Effectiveness Performance Alignment Attracting and Retaining Talent Improved Productivity Enhanced Employee Satisfaction |
| Reimbursable Allowances | Travel Allowance Medical Allowance Education Allowance | Benefits for Employees: Financial Relief Increased Morale Tax Benefits Benefits for Employers: Attracting and Retaining Talent Increased Productivity Cost-Effective Compliance |
3. Tax Implications of Employee Allowances in Malaysia
After receiving a comprehensive overview of the types of allowances, you might have already understood that some allowances are taxable. However, an important question remains unanswered- is allowance taxable in Malaysia? If yes, are there no exceptions?
3.1. Overview of Malaysian Tax Laws
Malaysia’s tax system is generally progressive, with higher-income earners facing higher tax rates and receiving various types of allowances for employees. According to this report in ASEAN Briefing, the primary source of government revenue is income tax, followed by sales tax and corporate tax. The comprehensive tax system covers various aspects of economic activity, including individuals, businesses, and specific industries.
Malaysian tax laws are designed to promote economic growth, social equity, and fiscal sustainability. To ensure compliance, the Inland Revenue Board Malaysia (IRBM) is responsible for administering and enforcing tax laws.
- Key regulations from the Inland Revenue Board of Malaysia (IRBM).
- Recent updates in tax legislation
3.2. Taxable vs. Non-Taxable Allowances
The types of allowances for employees can be taxable or non-taxable. Here is a list.
3.2.1. Non-Taxable Allowances
Certain benefits are specifically exempted from tax under Malaysian income tax laws. These include:
- Housing allowances
- Transport allowances
- Meal allowances
- Entertainment allowances
- Medical allowances
- Children’s education allowances
Conditions: To qualify as tax-free, these allowances must be provided in accordance with specific conditions and documentation requirements set by the Inland Revenue Board Malaysia (IRBM).
3.2.2. Taxable Allowances
- Allowances that are not explicitly exempted from tax are generally considered taxable income. This includes allowances for personal expenses such as clothing, entertainment, or personal travel.
- Even specified allowances can become taxable if they exceed the prescribed limits or are not used for the intended purpose. For example, if a housing allowance is provided in excess of the allowable amount, the excess portion may be considered taxable income.
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3.3. Tax Reporting Requirements
Malaysian employers and employees have specific tax reporting obligations to comply with the IRBM. These requirements vary depending on the type of taxpayer and the nature of their income. Here are a few obligations to look out for:
Employer obligations
- Employers are required to withhold income tax from employee salaries and wages.
- Company owners must submit monthly tax returns to the IRBM report, including the total income paid to employees and the amount of tax withheld.
- Employers must submit annual tax returns depending on the nature of their business.
Employee obligations
- Employees are required to contribute to the EPF. However, the rate varies based on age and salary.
- They must also file annual tax returns if the total income exceeds the taxable income threshold.
3.4. Strategies for Tax Optimisation
For individuals
- Claiming personal relief for yourself or your dependent children can lead to tax reduction.
- Apart from this, medical expenses, educational expenses, or contributions to charities can be a good alternative.
- Additionally, investing in tax-efficient instruments like real estate or sukuk is also a good choice.
For businesses
- Organisations in Malaysia can claim ITA for investments and qualifying capital assets.
- Investment tax credits and Research and development incentives can also be claimed to reduce the tax slab.
- Finally, by exploring tax-efficient investments, businesses can enjoy tax incentives.
Conclusion
Understanding the types of allowances for employees in Malaysia and their tax implications is crucial for both employees and employers. By optimising the use of allowances, individuals and businesses can maximise their financial benefits while ensuring compliance with tax laws.
FAQs on Employee Allowance Types in Malaysia
Q1. What is the tax rate for Malaysian employees?
A1. As per the recent Malaysia Budget, a person with a taxable income of between RM 50,001 and RM70,000 will be able to enjoy a reduction in tax from 13% to 11%. Additionally, the tax rate for those falling within the RM 70,001 to RM 100,000 slab has also been reduced from 21% to 19%.
Q2. How to reduce tax in Malaysia?
A2. If you are wondering – “is allowance taxable in Malaysia,” then the good news is you can also reduce the tax slab. Here is how you can do it.
- Claim all possible tax deductions.
- Earn Tax-free income
- Submit and pay income tax on time
- Follow the Income Tax Act
- Apply for tax incentive
- Seek the advice of a tax consultant
- Be charitable
Q3. What is the tax-exempt allowance in Malaysia?
A3. If the amount exceeds RM6,000, further tax deductions can be made depending on the amount spent for official duties. However, taxes can be fully exempted if the cumulative loan amount does not exceed RM300,000. In case of exceeding amounts, a calculation formula can be used to determine the public ruling for such allowances.
Q4. What are the benefits in kind in Malaysia?
A4. BIK refers to non-monetary perks provided by employers. They cannot be cashed out, exchanged, or sold despite their monetary value. For instance, housing or accommodation – semi-furnished, furnished, and service charges are benefits in kind.
Q5. Is the cost of living allowance taxable in Malaysia?
A5. Perquisites and BIK are benefits arising from different types of allowances and, hence, are taxable under paragraph 4(b) of the ITA.
