China: Five Insurances and One Fund

Five insurances and one fund (五险一金, wǔ xiǎn yī jīn) is the everyday term for China’s mandatory employment benefits package. The five insurances are pension, medical, work injury, unemployment and maternity. The one fund is the Housing Provident Fund. Together they are the largest single line of employer payroll cost in Mainland China, typically adding 30% to 35% on top of gross salary in a tier-one city.

This entry is organised the way the obligation actually presents itself in practice – as a sequence of decisions a payroll owner has to get right, in order.

Decision one: which city are you actually paying in?

This is the question that governs every number that follows, and it is the one foreign employers most often skip.

There is no national contribution schedule in China. Rates, wage floors, wage ceilings, Housing Provident Fund percentages and even the administrative calendar are set at municipal level. Beijing, Shanghai, Guangzhou and Shenzhen differ from one another in both percentage rates and salary caps, and second- and third-tier cities differ again.

The operational consequence: a company with staff in four cities is running four statutory configurations, not one Chinese payroll with four addresses. Rate tables have to be maintained per city, and an employee relocating between cities is a configuration change, not just an address update.

Where this goes wrong. A company applies its Shanghai contribution ceiling to a new hire in Chengdu, because that is what the payroll template contains. The contribution is wrong from month one, and nothing in the payslip flags it. The error surfaces at audit, with back contributions and late surcharges attached.

Decision two: what is the contribution base?

Payroll errors in China come from the base far more often than from the rate.

Contributions are calculated on a contribution wage, not on gross salary as paid. That wage is bounded against the local average wage, generally with a floor at 60% and a ceiling at 300%. An employee earning below the floor is contributed at the floor. An employee earning above the ceiling is contributed at the ceiling, not at actual salary.

Critically, the base is re-based annually, in most cities in July, when new local average wage figures are published. A payroll running last year’s base is under- or over-contributing for every employee, every month, until it is refreshed.

Where this goes wrong. July passes, the local average wage is updated, nobody reloads the base. Twelve months later the company has a systematic shortfall across its entire headcount rather than an isolated error on one employee.

Decision three: what are you actually contributing to?

Pension insurance funds retirement income through a personal account plus a social pooling fund. Employer contributions run around 16% of the contribution wage; employees contribute 8%.

Medical insurance covers hospitalisation, outpatient care and designated drugs. Rates are city-specific – Shanghai, for example, sits at roughly 10% employer and 2% employee, plus a small fixed monthly amount.

Work injury insurance is employer-funded only, broadly in the 0.2% to 1.9% range, set by industry risk classification rather than by choice. Using a generic rate instead of the correct risk band is a routine audit finding.

Unemployment insurance and maternity insurance carry comparatively low rates, and in many localities maternity is now administered together with medical insurance.

Housing Provident Fund is administered separately from the five insurances, commonly at 5% to 12% from each side within a city-set range. Contributions build in the employee’s personal account and can be drawn for buying, renting or renovating a home in China, with unused balances refundable when the employee leaves the country.

Budgeting rule of thumb: assume 30% to 35% on top of gross in a tier-one city, then confirm the specific figure for the specific city before committing to a headcount plan.

Decision four: can you and the employee agree to skip it?

No. And this is the change that matters most in 2026.

Historically, some employers and employees came to an informal arrangement: skip the contributions, pay a higher cash salary, both sides better off in the short term. It was common enough to be treated as normal practice in parts of the market.

Since 1 September 2025, following a judicial interpretation from China’s Supreme People’s Court, any agreement to waive social insurance contributions is void. The exposure is not just administrative. An employee can resign on the ground that the employer failed to contribute and claim statutory severance – even where that employee signed the waiver themselves, and even where they were the one who proposed it.

If any historic gross-up, opt-out or cash-in-lieu arrangement exists anywhere in your China population, it should be audited now. Likely exposure includes back contributions, late payment surcharges, administrative penalties and severance claims from employees who have since worked out that the arrangement is unenforceable against them.

Where this goes wrong. A long-serving employee on a legacy cash-in-lieu arrangement resigns, cites non-contribution, and claims statutory severance. The signed waiver in the file is worth nothing.

Decision five: do your foreign hires participate?

In most cases yes, which surprises employers who assume expatriates sit outside the system.

Under the Ministry of Human Resources and Social Security interim measures for foreigners employed in China – revised in 2024 and still in force – foreign nationals legally employed in China are generally required to participate on the same basis as local employees. Enforcement varies by city, which is where the misconception comes from, but variation in enforcement is not exemption.

The meaningful exemption route is a bilateral social security (totalisation) agreement. A national of a covered country who produces a certificate of coverage from their home scheme can be exempted from specified contribution categories. Housing Provident Fund treatment for foreign employees differs by city and is in some places waivable by agreement, unlike the five insurances.

For assignees paid partly outside China, this interacts with shadow payroll and expat payroll arrangements, and the certificate of coverage position should be settled before the assignment starts rather than reconstructed afterwards.

Decision six: what else is running alongside it?

Social insurance is one of three moving parts, and clearing one does not protect you on the others.

Individual income tax must be withheld monthly at progressive rates, with an annual settlement to follow.

Written labour contracts must be issued within one month of the start date. Missing that window can trigger double wages for up to eleven months – one of the highest-cost administrative failures in Chinese employment law.

Statutory severance runs at one month’s salary per year of service, half a month for service under six months, capped twice over: at twelve years of service and at three times the local average wage. Senior severance is therefore bounded, which is useful to know before negotiating an exit.

Decision seven: can you do this without a local entity?

Not directly. Social insurance registration, Housing Provident Fund registration and individual income tax withholding all require a registered local employer. There is no compliant route to contributing for an employee in China from an offshore entity.

The two options are incorporating locally, usually as a WFOE, or engaging an Employer of Record that holds the employment contract on its own Chinese entity and completes the registrations and filings in its own name.

How Mercans handles China

Mercans employs and pays staff in Mainland China through its own legal entity, with a full-time in-country team maintaining city-level contribution bases, Housing Provident Fund registration and individual income tax withholding on a single contract – including the annual July re-basing that catches so many offshore-managed payrolls.

Employer of Record and payroll in China covers companies hiring without a WFOE. Companies with an existing entity typically use managed payroll for city-specific social insurance and Housing Provident Fund administration, while incorporation and local statutory compliance handles entity setup and ongoing registrations. City-level contribution base and policy changes are published in statutory alerts as they are issued.

Hiring in China this year, or auditing a legacy waiver arrangement? Speak to a Mercans China payroll specialist.

Frequently asked questions

What does “five insurances and one fund” mean?

It is China’s mandatory employment benefits package: pension, medical, work injury, unemployment and maternity insurance, plus the Housing Provident Fund. Employers and employees both contribute, with rates and caps set at city level rather than nationally.

How much does social insurance cost an employer in China?

Budget roughly 30% to 35% on top of gross salary in a tier-one city, covering the five insurances and the Housing Provident Fund. The precise figure depends on the city and on the industry-based work injury rate, so it should be confirmed per location before you plan headcount.

Can an employee agree to opt out of social insurance?

No. Since 1 September 2025, any agreement to waive social insurance contributions is void. An employee can resign citing the employer’s failure to contribute and claim statutory severance even if they signed the waiver themselves.

Do foreign employees have to contribute?

Generally yes. Foreign nationals legally employed in China are required to participate on the same basis as local employees, though enforcement varies by city. The main exemption route is a bilateral totalisation agreement supported by a certificate of coverage from the home scheme.

What is the contribution base and why does it keep changing?

It is the wage figure contributions are calculated on, usually bounded between 60% and 300% of the local average wage. Most cities re-base it annually in July when new average wage data is published, so payroll configurations must be refreshed each year.

Is the Housing Provident Fund optional?

For local employees it is a statutory requirement, commonly 5% to 12% from each side depending on the city. For foreign employees the obligation is not universal and treatment varies by locality, with some cities permitting waiver by agreement.

Can a company pay someone in China without a local entity?

No. Social insurance registration, Housing Provident Fund registration and income tax withholding all require a registered local employer. Companies without an entity typically use an Employer of Record that holds the contract on its own Chinese entity.