CPF Transition Offset

In Budget 2025, Prime Minister Lawrence Wong announced an increase in the Central Provident Fund (CPF) contribution rates for employees aged 56 to 65 by 1.5%, effective from 1 January 2026. Employer CPF contributions for employees aged 56 to 60 who draw above $750 a month will increase by 0.5% to 16% and employee contributions will increase by 1% to 18%.

Impact on businesses

Employers will face higher payroll expenses due to the rise in CPF contribution rates for senior employees. This change requires adjustments at the company level in financial planning and budgeting to accommodate the increased contributions.

Businesses will also need to update their payroll systems to reflect the new CPF contribution rates and ensure compliance.

This change in contribution rates is aimed at enhancing the retirement savings of our senior workers. While it does entail a financial impact to businesses, to reduce the burden on businesses, Prime Minister has also announced that he will extend the CPF Transition Offset (CTO) for an additional year to 2026.

CTO as a support tool

The CTO is a government initiative designed to alleviate the immediate financial impact on employers resulting from increased CPF contribution rates for senior workers, enabling a smoother adjustment period to accommodate the enhanced CPF contribution requirements. For the year 2026, the CTO will offset 50% of the increase in employer CPF contributions. By covering half of the increased CPF contributions, the CTO cushions the immediate rise in labor costs for businesses, allowing them time to adjust to the new rates.

The exact financial cost to an employer depends on the wage levels of their senior employees. For instance, if an employee aged 58 earns a monthly salary of $4,500, the 1.5% increase translates to an additional $67.50 in employer CPF contributions per month. With the CTO covering half of this increase, the employer would receive an offset of $33.75 per month for that employee, for a total CTO of $405 for the year 2026.

It is important to note that the CTO is a temporary measure, applicable only for the year following the rate increase. Employers should plan for the full impact of the increased CPF contribution rates in subsequent years.