PRC: Updates on local average salary and their impacts

Since late June, local statistical bureaus across China have been announcing the local average salary of employees for the year 2023. This update summarizes the latest local municipal average salary data from four major cities: Beijing, Shanghai, Guangzhou, and Shenzhen, and outlines the impact this change will have on employment management.

Latest Local Average Salary in Major Cities

In keeping with tradition, China's regional statistical bureaus release the previous year's local average salary each year in June and July. The following table presents the most recent data on the average salary in Beijing, Shanghai, Guangzhou, and Shenzhen. 

Impact of Local Average Salary Adjustments

Severance

The primary impact of local average salary adjustments is on the calculation of statutory severance. According to the Employment Contract Law, employers are required to pay severance when employment contracts are terminated under specific scenarios (such as mutual termination, non-renewal upon expiration, etc.). The basic formula for statutory severance is one month's salary per year of service. This one month's salary refers to the average salary of the employee over the 12-month period preceding the termination or expiry of the employment contract, but is capped at three times the local monthly average salary for the municipality in which the employer is located.

The tax-free threshold for severance is also affected. According to tax regulations, employees are exempt from individual income tax for one-time compensation income (including severance) received upon termination of the employment relationship with the employer, up to three times the local average annual salary. 

The following table sets out the cap of the monthly base for statutory severance as well as the tax-free threshold for severance in the four major cities, based on the latest local average salary data.

Social Insurance and Housing Fund

Following the release of the latest local average salary data, the upper and lower limits for the monthly contribution base of social insurance and housing fund will also be adjusted. Typically, the monthly contribution base for an employee's social insurance and housing fund is determined by the employee's average salary from the previous year, but is subject to certain upper and lower limits. The lower limit for social insurance contribution base is generally 60% of the local average salary, with the upper limit set at three times the local average salary. The lower limit for housing fund contribution base is the local statutory minimum salary, and the upper limit is three times the local average salary.

That said, it's crucial to note that local authorities may adopt varying standards for determining the upper and lower limits of the social insurance and housing fund contribution bases, based on local circumstances. For example, in Beijing, the relevant authorities will separately announce the upper and lower limits for social insurance and housing fund contribution bases, which will no longer be directly tied to the local average salary. Therefore, it is advisable for employers to refer to the figures announced by the relevant authorities when considering the contribution bases for social insurance and housing funds.

A summary of the adjustments as of 23 September 2024 to the limits for social insurance and housing funds contribution bases in the four major cities mentioned are set out in the table below. 

Key Takeaway

Complying with salary-related regulations not only ensures legal compliance but also contributes to a positive working environment and employee satisfaction. Employers should review and adhere to the latest salary standards, including minimum salary and statutory severance, to ensure fair treatment of employees. It is also crucial to stay updated on the changes in social insurance and housing fund contribution cap, as these adjustments affect payroll calculations and benefits for employees.

In this article, we have focused on salary data in the four major cities where foreign investment is concentrated. If your entity is located in other cities in Mainland China, feel free to get in touch with us for further information.