CP38 Deduction Order Malaysia: What Employers Must Do When LHDN Issues One
If LHDN has issued your company a CP38 notice, you have a legal obligation to act — and act correctly.
Unlike the regular PCB (MTD) that employers calculate each month, CP38 is an additional tax deduction order issued directly by LHDN, instructing you to deduct a specified extra amount from an employee’s salary.
This guide explains what CP38 is, when it is issued, exactly what employers must do, and the key compliance pitfalls to avoid.
What Is CP38 in Malaysia?
CP38 is a tax deduction instruction issued by Lembaga Hasil Dalam Negeri (LHDN) to an employer, requiring them to deduct an additional sum from an employee’s salary each month.
This amount is separate from — and in addition to — the monthly PCB/MTD deduction the employer already calculates.
The CP38 is LHDN’s mechanism for recovering tax arrears or underpaid tax directly at source, without requiring the employee to make the payment themselves.
Why Does LHDN Issue a CP38?
CP38 is typically issued when:
- The employee has outstanding income tax from a prior assessment year
- The employee’s PCB deductions were insufficient to cover their actual tax liability
- LHDN has identified discrepancies between declared and actual income
- The employee has additional income sources (e.g., rental, freelance) that were not reflected in their employer payroll
In most cases, the employee will have received a prior notice from LHDN, but employers should not rely on this — the CP38 instruction to the employer is independent and binding.
What Must the Employer Do When CP38 Is Received?
As an employer, you have a mandatory legal obligation to comply with a CP38 instruction. Here is what the process looks like:
Step 1: Record the CP38 Instruction
Keep a copy of the CP38 notice on file. It will specify the employee’s name, TIN, the monthly deduction amount, and the duration or total amount to be recovered.
Step 2: Deduct from the Next Salary Payment
Begin deducting the CP38 amount from the employee’s salary in the next payroll cycle after receiving the instruction. Delays or under-deductions may expose the employer to compliance risk and possible liability, depending on LHDN’s instruction and the circumstances.
Step 3: Remit Separately from PCB
CP38 must be submitted and paid to LHDN separately from the monthly PCB (CP39). The two are distinct obligations. Combining them in a single payment is incorrect and may result in misallocation.
A clear, well-structured Malaysia payslip should reflect the CP38 deduction as a distinct line item so employees can see it clearly.
Step 4: Maintain Records
Keep records of every CP38 deduction and payment. LHDN may request these during an audit.
CP38 vs PCB (CP39): Key Differences
| PCB (CP39) | CP38 | |
|---|---|---|
| Who calculates it? | Employer (based on salary & reliefs) | LHDN (fixed amount instructed) |
| Purpose | Monthly progressive tax deduction | Recovery of tax arrears |
| Can employer modify? | Yes, based on TP1 reliefs declared | No — amount fixed by LHDN |
| Deadline | 15th of following month | 15th of following month |
Understanding this distinction is important for payroll accuracy. See also our guide to understanding CP22, CP22A and CP21 for related LHDN employer obligations.
How Is CP38 Paid?
CP38 deductions are submitted together with the employer’s monthly tax remittance to LHDN.
Most employers submit payments electronically through the same channels used for PCB.
The payment should clearly include the employee’s tax information so LHDN can allocate the payment correctly.
What Happens If the Employer Does Not Comply?
Non-compliance with a CP38 instruction is a serious offence under the Income Tax Act 1967.
Employers who fail to deduct or remit CP38 as instructed may be held personally liable for the unpaid amount. LHDN can pursue the employer directly for the outstanding sum, plus penalties.
Once a CP38 instruction has been received, employers should not ignore it or delay action. If the employee has left, the employer should notify LHDN and keep records of the deductions already made.
What Happens When the Employee Leaves Before CP38 Is Completed?
If an employee resigns or is terminated before all CP38 deductions are fully recovered, the employer should notify LHDN according to the applicable cessation or tax clearance requirement.
In general, CP22A is used for notification of cessation of employment for private sector employees, while CP22B applies to public sector employees. CP21 applies where an employee is leaving Malaysia for a period exceeding 3 months.
Any remaining CP38 amount that could not be deducted from the employee’s salary should be handled according to LHDN’s instruction. Employers should keep proper records of the deductions already made, payments remitted and any communication with LHDN.
Employee Communication: Does the Employee Know About CP38?
In most cases, the employee will have received a prior tax assessment or payment notice from LHDN. However, many employees are unaware a CP38 has been issued to their employer until they see the deduction on their payslip.
It is best practice for HR to inform the affected employee as soon as the CP38 is received — this reduces confusion and potential disputes.
Remind employees to keep their personal tax relief declarations up to date with LHDN to avoid future underpayment situations that trigger CP38.
FAQ: CP38 Deduction Order Malaysia
1. Can the employer reduce the CP38 deduction amount?
No. The deduction amount is fixed by LHDN and cannot be modified by the employer without written approval from LHDN. If the employee believes the amount is incorrect, they must liaise directly with LHDN to resolve it.
2. Is CP38 deducted from the employee’s gross or net salary?
CP38 is an additional salary deduction made on top of the employee’s regular PCB/MTD deduction. It does not reduce the employee’s gross salary for the purpose of calculating EPF, SOCSO or EIS contributions.
3. Do I need to show CP38 on the payslip?
Yes. Best practice — and increasingly, standard compliance expectation — requires CP38 to be shown as a separate deduction line on the payslip, distinct from PCB. This ensures transparency and creates an audit trail.
4. What if the employee’s salary is insufficient to cover the full CP38 deduction?
If the employee’s salary is insufficient to cover the full CP38 deduction, the employer should not ignore the instruction. The employer should deduct according to the available payroll amount and seek clarification from LHDN on how to handle the shortfall. Keep proper records of the salary amount, deduction made and any communication with LHDN.
5. Can a CP38 deduction be claimed as a tax deduction by the employee?
No. CP38 represents payment of the employee’s own tax liability. It is not a new tax or levy — it is recovery of tax the employee already owed. There is no additional tax deduction claim arising from a CP38 payment.
Final Thoughts
A CP38 deduction order from LHDN is not optional — it is a legally binding instruction and must be actioned promptly. Employers who fail to comply risk direct liability for the outstanding tax amount.
The key steps are simple: receive the instruction, deduct from the next payroll, remit the CP38 deduction to LHDN together with your monthly tax payment , and notify LHDN if the employee leaves before deductions are complete.
For businesses looking to reduce manual compliance risk across all LHDN obligations, CentralHR’s payroll outsourcing services provide a fully managed solution.
Disclaimer: This article is for general HR and payroll information only and does not constitute legal, tax or professional advice. Employers should refer to the latest official guidance from LHDN, JTKSM and the applicable Malaysian laws, or seek professional advice for specific cases.
