Ask Melanie: Tax loans

What's the best way to cover my Hong Kong tax bills due in January and April? Should I get a tax loan as interest rates are low at the moment?

Let's tackle the second question first. The interest charged on an unsecured tax loan is higher than a mortgage, for example, where your property can be sold if you default.

Banks have just started their seasonal push to lend money for tax payments. Comparing the various deals takes time but basically rates depend on how much you borrow, the loan term and when you apply. The more you borrow the lower the rate: a loan of more than HK$300,000 costs less than 5 per cent per annum; a loan of less than HK$20,000 costs nearly 9 per cent. Loans are usually from six to 12 months. Some banks discount the rates by nearly 50 per cent if you apply before December 31. Credit card companies also offer tax loans but at alarming rates.

Assuming you have otherwise set aside savings to pay your tax, the only reason for a tax loan would be if you can invest your savings for a higher return than the cost of the tax loan. Returns being relative to risk, this is usually difficult at any stage of market cycles. I don't recommend punting your tax money.

If you don't have enough money for tax you will have to figure out how to make provision for tax for two years, and that can be painful.

Some people count on a 13th month salary, or annual bonus, to pay their tax which is fine if it comes to fruition. Watch out for falling bonuses in tough times.

If you don't receive that, the best strategy is the Electronic Tax Reserve Certificates (TRCs) Scheme offered by the Inland Revenue Department

It's a "save for tax" scheme open to all taxpayers.

You estimate how much tax is payable on your income and buy tax credits as you earn through autopay, by telephone, internet or ATM. Autopay is ideal for those receiving regular income. Those receiving irregular income might use autopay to cover average base income per month or per quarter, with top-ups each time lump sums are earned.

TRCs credited to your account will be redeemed on your tax due date towards your tax balance unless you advise otherwise. The letter of confirmation gives tremendous peace of mind just as Christmas and Lunar New Year come around. Added to this is interest of 0.0433 per cent per annum on TRCs redeemed to pay tax.

Applying to open a TRC account and setting up bank autopay is easy. The application form is on the Inland Revenue Department's website and takes 10 minutes to complete. The autopay takes about six weeks to set up.

If you do it today you will be off to a good start for the new year and tax loans will be irrelevant.

The views presented are of a general nature. For specific advice, talk to a professional planner. See the column archive at scmp.com/askmelanie