Types of Allowances for Employees in Malaysia

Employee allowances are an important part of total compensation in Malaysia. Beyond basic salary, these allowances help employees manage work-related expenses such as transport, meals, or housing, while motivating better performance.

Why Employee Allowances Matter

An allowance is a monetary payment given to employees in addition to their basic salary. It usually covers specific work-related expenses or compensates employees for certain conditions related to their job.

Purpose of Allowances

Offset additional costs employees may incur (e.g., commuting, meals, housing).
Reward effort or working conditions (e.g., night shifts, performance).
Attract and retain talent in competitive industries.

Allowances vs Salary vs Benefits

A salary refers to the fixed payment employees receive for the work they perform, as stated in their employment contract.

An allowance, on the other hand, is an additional monetary payment given to employees based on specific job requirements or conditions.

Meanwhile, a benefit represents non-monetary perks such as insurance, paid leave, or medical coverage.

Allowances play an important role in determining an employee’s total take-home pay and are often included in payroll tax, EPF, and SOCSO calculations, depending on the type of allowance.

Statutory / Common Allowances in Malaysia

Some allowances are standard or regulated under employment law or company practices. These are commonly found across most industries in Malaysia:

Cost of Living / Housing Allowance

This allowance helps employees manage living expenses, especially in urban areas where the cost of rent and daily necessities is high. It is meant to help employees maintain their purchasing power amid inflation. In most cases, the cost of living or housing allowance is taxable and also counted for EPF contributions.

Transport / Travel Allowance

Transport or travel allowance compensates employees for commuting costs or work-related travel using their personal vehicles. It covers expenses such as fuel, tolls, and parking. The allowance is generally non-taxable up to RM6,000 per year if it is used strictly for official duties.

Meal / Food Allowance

This allowance is provided when employees need to work during meal hours, at remote sites, or while on overtime. It ensures that employees can maintain their well-being even when working beyond normal hours. The allowance is non-taxable if the company provides actual meals or meal vouchers, but taxable if it is given as cash.

Shift / Night Allowance

Shift or night allowance is paid to employees who work late shifts or irregular hours, compensating them for the inconvenience and the potential impact on health and personal life. This type of allowance is taxable and must be included in EPF and SOCSO contributions.

Overtime Allowance

Overtime allowance is the legally required payment for employees who work beyond normal working hours, as stated in the Employment Act 1955. It rewards employees for additional hours worked.

The standard calculation is 1.5 times the hourly rate on normal days, twice the hourly rate on rest days, and three times on public holidays. Overtime allowance is taxable and contributes to EPF.

On-Call / Call-Out Allowance

This allowance is given to employees who must remain available outside their normal working hours to respond to emergencies or urgent company needs. It’s common in industries such as healthcare, IT, and maintenance. Because it is considered part of employment income, the on-call allowance is fully taxable.

Attendance / Incentive / Bonus Allowance

This allowance rewards employees for consistent attendance, punctuality, or meeting performance targets. It is often used to motivate employees to maintain discipline and productivity. All attendance, incentive, and bonus allowances are taxable and generally contribute to EPF.

Discretionary / Company-Specific Allowances

Apart from statutory or common allowances, many companies in Malaysia offer additional allowances based on internal policies or business needs. These allowances are not legally required but are often introduced to improve employee satisfaction, retention, and motivation.

Flexi Allowance

A flexi allowance combines several smaller allowances, such as transport, phone, or meal, into one flexible payment. Employees can decide how to use it based on their personal or work-related needs. This type of allowance gives companies flexibility while reducing administrative work in managing multiple small payments.

Mobile / Telecommunication Allowance

This allowance is given to employees who use their personal mobile phones and data plans for work-related communication. It helps cover phone bills, data packages, and other communication costs. The mobile or telecommunication allowance is non-taxable up to RM2,400 per year if it is proven to be used for official business purposes.

Uniform / Clothing / Housing Allowance

Certain industries require employees to wear specific uniforms or adhere to dress codes, which can lead to additional expenses. To compensate, employers may provide a uniform or clothing allowance to cover purchase or maintenance costs.

In cases where employees live in company-provided housing, a housing allowance may also be offered. This allowance is usually non-taxable if uniforms or accommodation are required and provided as part of the job.

Special / Hazard / Hardship Allowance

This allowance is given to employees who work under difficult, hazardous, or remote conditions. For example, construction workers, offshore oil platform staff, or employees stationed in rural areas may receive this allowance as recognition for their challenging work environments. The special or hazard allowance is fully taxable.

Relocation / Assignment Allowance

Employees who are transferred to another city or country for work may receive a relocation or assignment allowance. It helps cover expenses such as moving costs, temporary accommodation, and other living adjustments.

The relocation allowance may be partially exempt from tax if it is used strictly for relocation-related expenses in line with the Inland Revenue Board (LHDN) guidelines.

Best Practices for Employers

To manage allowances effectively and stay compliant with Malaysian labour and tax laws, employers should:

Document Allowances in Employment Contracts

Clearly list all allowances, their purpose, frequency, and eligibility conditions.

Be Consistent and Transparent

Apply allowance policies fairly across departments and job levels.

Review Periodically

Update allowance rates based on inflation, job market, or company performance.

Communicate with Employees

Explain what each allowance covers and how it affects take-home pay and tax deductions.

Stay Updated with EPF, SOCSO, and LHDN Guidelines

Some allowances are taxable or EPF-contributable, while others are exempt. So, regular HR/payroll training is key.

FAQs

Are allowances taxable in Malaysia?

Most allowances are taxable unless specifically exempted by the Inland Revenue Board (LHDN). Examples of partial exemptions include travel allowances (up to RM6,000/year) and mobile phone allowances (up to RM2,400/year).

Can an employer withdraw an allowance once granted?

If an allowance is clearly stated in the employment contract or collective agreement, it cannot be withdrawn unilaterally. Any removal requires employee consent or contract revision.

Do allowances count when calculating EPF or SOCSO contributions?

Yes, most fixed and regular allowances (e.g., transport, meals, housing) are considered wages for EPF and SOCSO purposes. However, irregular or reimbursement-type payments may be excluded.

Can allowances replace salary increments?

Allowances can supplement compensation but should not be used to permanently replace salary increments, as the base salary determines key statutory benefits, such as EPF and overtime.

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