The Sole Proprietor’s Guide to Income Tax in Malaysia

Introduction

While a Sdn Bhd is the most popular type of business structure in Malaysia, many entrepreneurs choose Sole Proprietorships due to lower startup costs and simpler compliance requirements.

For those reasons, a Sole Proprietor is more likely to handle their own tax obligations. While hiring a qualified tax agent may not be as expensive as you think, independence is an important characteristic in entrepreneurs and hey, we’re here to help however we can.

If you are new to the world of income tax as a Sole Proprietor, this post covers essential information for you to meet your tax obligations.

Here’s how we’ll break it down:

1. Key terms
2. Malaysia’s income tax brackets and marginal tax rate
3. Required documents
4. Tax deductions
5. Filing options and deadlines

Let’s start!

Understanding Key Terms

Not to overload you, but we know how annoying it is to come across an unfamiliar term and have to proceed with an educated (or blind) guess. To clearly understand the rest of this guide, here are four terms you should get familiar with:

1. Chargeable income
   The portion of your income deducting allowable deductions, exemptions, and allowances. This is the part that actually gets taxed.
2. Tax deductions
   Various expenses that can be subtracted from your taxable income, reducing the amount of tax owed.
3. Progressive tax system
   Higher amounts of chargeable income are subject to a progressive higher tax rate.
4. Marginal tax rate
   In a progressive tax system, marginal tax rates allow your total chargeable income to be spread across lower and higher tax brackets based on their respective limits. This means you pay less than you would if your entire chargeable income was taxed in a single higher bracket.

With that out of the way, let’s take a look at how income tax gets calculated in Malaysia.

Malaysia’s Income Tax Brackets and Rates

The following table shows income tax brackets and rates in Malaysia for chargeable income from 2022.

Category	Chargeable Income	Calculations (RM)	Rate %	Tax (RM)
A	0 – 5,000	On the First 5,000	0	0
B	5,001 – 20,000	On the First 5,000 Next 15,000	1	0 150
C	20,001 – 35,000	On the First 20,000 Next 15,000	3	150 450
D	35,001 – 50,000	On the First 35,000 Next 15,000	8	600 1,200
E	50,001 – 70,000	On the First 50,000 Next 20,000	13	1,800 2,600
F	70,001 – 100,000	On the First 70,000 Next 30,000	21	4,400 6,300
G	100,001 – 250,000	On the First 100,000 Next 150,000	24	10,700 36,000
H	250,001 – 400,000	On the First 250,000 Next 150,000	24.5	46,700 36,750
I	400,001 – 600,000	On the First 400,000 Next 200,000	25	83,450 50,000
J	600,001 – 1,000,000	On the First 600,000 Next 400,000	26	133,450 104,000
K	1,000,001 – 2,000,000	On the First 1,000,000 Next 1,000,000	28	237,450 280,000
L	Exceeding 2,000,000	On the First 2,000,000 Next ringgit	30	517,450 ……….

Let’s look at marginal tax rates in action with a fictional example: meet Ah Keong, a highly successful barber who one day hopes to be a Grand Prix motorcycle champion.

After relevant deductions, let’s say Ah Keong earns chargeable income of RM150,000 in 2022. This means his income spans across Categories A – G, and the calculation works out like this:

• Category A: The first RM5,000 is not taxed – Abu pays nothing.
• Category B: The next RM15,000 is taxed at 1% which comes to RM150. (we’re now at RM20,000)
• Category C: The next R 15,000 is taxed at 3% which comes to RM450. (we’re now at RM35,000)
• Category D: The next RM15,000 is taxed at 8% which comes to RM1,200. (we’re now at RM50,000)
• Category E: The next RM20,000 is taxed at 13% which comes to RM2,600. (we’re now at RM70,000)
• Category F: The next RM30,000 is taxed at 21% which comes to RM6,300. (we’re now at RM100,000)
• Category G: The final RM50,000 is taxed at 24% which comes to RM12,000. (we’re now at RM150,000)

Add them all together and Ah Keong owes LHDN RM22,700 in income tax.

Without marginal tax rates, Ah Keong’s RM150,000 would be subject to a flat 24% coming to RM36,000. There goes his dream of getting a neon green Kawasaki Ninja!

Now let’s look at income tax documents specific to Sole Proprietors.

By the way, if your sole proprietorship is bumping you into tax brackets above 17%, consider converting your business into a Sdn Bhd to enjoy lower overall tax burdens. Download our free checklist for a complete self-assessment!

Required Documents

Sole proprietors must annually file Form B before 30 June, which is a document specific for residents in Malaysia with business income.

Here’s a link to the 2022 Form B in English and 2022 Form B in Bahasa Melayu.

Here are official LHDN guides to navigating Form B and properly enter information.

• English Form B Guide
• Bahasa Melayu Form B Guide

As the official guides are quite lengthy, we recommend reading our guide first, so you’ll go in with some prior knowledge.

Let’s finish up by explaining tax deductions, tax refunds, and how to file your taxes with LHDN.

Tax Deductions

Collectively, deductions are the various mechanisms that reduce the overall amount of income tax owed. Here are the different types of deductions you’ll want to take note of.

We don’t think it would do much good to list out all allowable items here, but we’ll provide official links where we can.

Business expenses

Business expenses refer to costs directly incurred in the operation of your Sole Proprietorship. This includes items such as rent, utilities, office supplies, employee salaries, advertising and promotion expenses, insurance premiums, travel expenses, and professional fees.

Donations

Donations made to approved charitable organisations or institutions in cash or approved assets are eligible for tax deductions. You can find an official list of tax deductible donations on LHDN’s portal here.

Personal reliefs

Just like ordinary residents, you are entitled to personal reliefs which are considered a separate entry from business-related deductions. Here is the official LHDN list of personal tax reliefs.

Reminder: allowable deductions change

This isn’t really something you can memorise overnight, and as the list is ever-evolving, best practice is to visit the official links above or speak to a tax advisor annually.

Your final chargeable income is the amount left over after taking away the various tax deductions and it should go without saying but be sure to maintain proper documentation including receipts, invoices, and payment vouchers to support your claims.

Now on to the last part.

Form B Filing Options and Deadlines

This is something you should memorise overnight: the deadline to submit Form B to LHDN is June 30th every year.

Submission can be made online or physically.

For online submission:

1. Register for an account on MyTax.
2. Visit LHDN : e-Filing and select e-B.
3. Fill in the form and submit.

For physical submission:

1. Fill out and print the Bahasa Melayu version of Form B according to LHDN printing guidelines.
2. Deliver it to LHDN premises at the following address:

Lembaga Hasil Dalam Negeri Malaysia
Seksyen Pengurusan Rekod & Maklumat Percukaian
Jabatan Operasi Cukai
Karung Berkunci 00222
43650 Bandar Baru Bangi
Selangor, Malaysia.

Consider Hiring a Qualified Tax Agent

Don’t get us wrong, we think getting first-hand experience with calculating and filing your taxes will come in handy when you’re ready to hire your first tax agent or accountant – imagine if they knew less than you did.

That said, if you are convinced your time would be better spent on other areas of your business, or you simply hate doing taxes that much, MISHU’s qualified tax agents and accountants are here to assist you. We provide professional services at affordable prices, with various plans to suit your business needs. Don’t wait for June 30th to get dangerously close – talk to us now!