Your Payroll Has 5 New Rules in 2026 Does Your Malaysian SME Know All of Them?

What every Malaysian SME owner needs to know before enforcement catches up with them

Published by HCR Malaysia | HR Insights | June 2026

Picture this. It's a Tuesday afternoon. Your phone rings. It's KWSP.

They've flagged an inconsistency in your EPF submissions going back eight months. You've been applying the wrong employer contribution rate. The backpay and penalties? Over RM14,000.

You didn't know. You weren't trying to break any rules. You were just running your business.

This isn't a made-up scenario. It's the kind of situation we see more and more Malaysian SME owners walking into — not because they're careless, but because payroll in Malaysia has quietly become one of the most complicated things a small business has to manage.

In the last 18 months alone, there have been five significant changes to how Malaysian payroll works. Most SME owners we speak to know about one or two of them. The others are ticking away silently in the background.

Here's what changed — and what it costs to get it wrong.

1. The Minimum Wage is Now RM1,700 — No Exceptions

Effective: 1 August 2025

Malaysia's minimum wage rose to RM1,700 per month. As of August 2025, every employer in the country must comply — including businesses with fewer than five staff. The earlier deferment for small employers has ended.

The mistake most SMEs make: Counting allowances toward the minimum wage. Transport allowance, meal allowance, attendance bonus — none of these count. The RM1,700 must be the basic salary. If your employee earns RM1,500 basic plus RM200 transport, they are being underpaid under the law.

The Ministry of Human Resources has been actively enforcing this. Inconsistent payroll records are one of the fastest ways to trigger an audit.

The penalty: Up to RM10,000 per affected employee.

2. EPF Now Has Three Accounts — and the Calculations Are Different

Effective: May 2024

EPF restructured member accounts from two to three:

Account 1 (Persaraan): 75% — retirement, cannot be withdrawn early
Account 2 (Sejahtera): 15% — housing, education, health
Account 3 (Fleksibel): 10% — can be withdrawn anytime

What employers miss: If your payroll software hasn't been updated to reflect the three-account split, you may be remitting incorrectly. KWSP's system will eventually flag the discrepancy — and late or inconsistent EPF submissions attract penalties that compound over time.

Check with your payroll software provider that the system is current. If you're still doing payroll on a spreadsheet, this is the year to stop.

3. Foreign Workers Must Now Be Included in EPF — This One Caught Many Off Guard

Effective: October 2025 wages, first payment due 15 November 2025

From October 2025, all foreign workers with valid employment passes must be included in EPF. Both employer and employee each contribute 2% of monthly wages.

This applies to every employer — manufacturing, F&B, construction, retail, domestic. There are no exemptions based on company size.

SMEs are not exempt from EPF reviews. Audits can apply to businesses of any size, and the advice is clear: don't assume foreign staff are automatically outside statutory systems — always verify the latest requirements by employee category instead of relying on old practice.

The Federation of Malaysian Manufacturers estimated this change alone adds billions in annual industry costs. For a small F&B operator with five foreign workers earning RM1,700 each, that's roughly RM2,040 in additional employer EPF contributions per year — not enormous, but unbudgeted if you didn't know it was coming.

The penalty: Up to RM10,000 plus up to one year imprisonment.

4. The SOCSO Wage Ceiling Has Increased

Effective: October 2024

The SOCSO wage ceiling increased to RM6,000 in 2026. A common error is using old caps — like RM5,000 — for statutory contribution calculations.

This means if you have employees earning between RM5,000 and RM6,000 per month, their SOCSO contributions are now calculated on their full salary — not capped at the old RM5,000 limit. Your SOCSO costs for this salary band have increased.

What to check: If your payroll system was set up before October 2024, verify the ceiling has been updated. This is the kind of change that slips through unnoticed until an audit catches it.

5. HRD Corp Will Deduct Your Unused Levy — Starting Now

Effective: March 2025 (Circular 5/2024)

If your company is registered with HRD Corp and hasn't fully utilised your training levy, 15% of your unused balance is now deducted automatically from March 2025 onward.

Previously, unused levy just sat in your account. Now there's a direct financial cost for leaving it unclaimed.

Example: RM10,000 in unclaimed levy = RM1,500 deducted. Gone.

What to do right now: Log into your HRD Corp account, check your balance, and plan your training activities before the next deduction cycle.

Also worth knowing: If your company has reached 10 employees, HRD Corp registration is mandatory. Fast-growing SMEs often hit this threshold without realising the registration obligation has been triggered — and non-compliance carries its own penalties.

Why Is This Getting More Complicated Every Year?

Malaysian payroll is not actually complex — it is just relentlessly detailed. EPF, SOCSO, EIS, and PCB each have their own rate logic, their own eligibility rules, and their own monthly deadline. Done correctly every month, year-end is uneventful. Done badly, the penalties from any one of LHDN, KWSP, or PERKESO can erase a year of SME profit.

And these five payroll changes didn't arrive in isolation. They came alongside Employment Act amendments, new OSHA obligations, PDPA requirements, and the Gig Workers Act. Malaysian employment compliance has fundamentally shifted in two years.

For an SME owner who is also managing operations, chasing payments and handling customers — staying on top of all of this is genuinely difficult. The businesses that get caught out aren't the ones trying to cheat the system. They're the ones who simply didn't know the rules had changed.