# What Is CP38? A Guide for Malaysian Employers
CP38 is an additional tax deduction instruction issued by the Inland Revenue Board of Malaysia (LHDN) to an employer to recover an employee's outstanding income tax. Unlike Potongan Cukai Bulanan (PCB), which relates to tax for the current assessment year, CP38 is used to settle existing tax arrears according to LHDN's specific instructions. Employers must process the deduction and remit the payment in accordance with the instruction received.
What is CP38 and when does it apply?
CP38 is an instruction from LHDN requiring an employer to deduct a specified amount from an employee's remuneration in designated months. It is intended to help settle the employee's outstanding tax liability through payroll.
An employer should not treat CP38 as an ordinary deduction that can be introduced at its own discretion. The deduction must be supported by an instruction from LHDN, and the employer should follow the amount and schedule stated in that instruction.
CP38 may appear alongside PCB in an employee's monthly payroll records. The two deductions serve different purposes, so employers need to record them separately and ensure that the correct amounts are remitted.
For official information, refer to LHDN's individual frequently asked questions, particularly the question explaining the meaning of a CP38 salary deduction instruction.
What is the difference between CP38 and PCB?
Although both deductions are associated with income tax, their purposes differ.
| Item | PCB | CP38 |
|---|---|---|
| Purpose | Monthly tax deduction for the current assessment year | Additional deduction to settle outstanding tax |
| Authority | Calculated under the applicable monthly tax deduction rules | Based on a specific LHDN instruction |
| Amount | Determined using the applicable calculation method and employee information | Specified by LHDN in the instruction |
| Payroll treatment | Recorded as PCB | Recorded separately as CP38 |
| Payment reporting | Reported under the PCB category | Reported under the CP38 category |
An employee who already has PCB deducted from their salary may still be subject to CP38 if LHDN issues the relevant instruction. The existence of PCB does not automatically cancel or replace CP38.
Employers should explain the difference to employees who query why two tax-related deductions appear on the same payslip. The explanation should be based on the actual instruction and the employee's payroll records, rather than an assumption that one deduction is a duplicate of the other.
How should employers process CP38 through payroll?
A consistent process helps reduce errors and ensures that the instruction is implemented correctly.
- Verify the instruction. Confirm that the CP38 instruction was issued by LHDN and identify the employee concerned.
- Check the deduction schedule. Review the amount and the months specified in the instruction.
- Update payroll records. Enter the CP38 deduction separately from PCB so that each amount can be identified.
- Calculate the employee's payroll. Apply the authorised CP38 amount together with the other applicable payroll items, subject to the relevant legal requirements.
- Review the payslip. Ensure that the employee can distinguish CP38 from PCB and other deductions.
- Prepare the payment. Follow LHDN's applicable payment and reporting procedure, keeping PCB and CP38 amounts separate in the required fields.
- Retain supporting records. Keep the instruction, payroll calculations and payment evidence for future reference.
If the instruction contains information that does not match the payroll record, the employer should clarify the discrepancy with LHDN before making assumptions about the amount or schedule.
Example: calculating a monthly CP38 deduction
Assume an employee has a monthly salary of RM4,500, PCB of RM180 and a CP38 instruction requiring a deduction of RM100 for the relevant month. The figures below are illustrative and are not an official tax calculation.
- Monthly salary: RM4,500.00
- PCB deduction: RM180.00
- CP38 deduction: RM100.00
- Total of these two tax deductions: RM180.00 + RM100.00 = RM280.00
- Salary remaining after these two deductions only: RM4,500.00 − RM280.00 = RM4,220.00
The amount of RM4,220.00 is not necessarily the employee's final net salary because other applicable items, such as EPF, SOCSO, EIS and authorised deductions, may also affect the final amount.
The example also demonstrates why CP38 should not simply be added to the PCB field. Recording the two items separately makes payroll reconciliation and reporting more reliable.
Common CP38 payroll mistakes to avoid
Employers should pay attention to the following issues:
- Treating CP38 as PCB. The deductions serve different purposes and must be identifiable in payroll records.
- Ignoring the instruction schedule. A deduction should follow the applicable amount and months specified by LHDN.
- Using the wrong employee record. Verify the employee's identity before applying the instruction.
- Failing to reconcile payments. Compare payroll deductions against the amounts reported and paid.
- Assuming that a payslip entry completes the process. Recording a deduction is not the same as remitting the money to LHDN.
- Failing to retain evidence. Keep the instruction, payroll records and payment confirmations together.
Where an employee leaves the organisation or their remuneration changes, the employer should review the circumstances and seek clarification from LHDN if the existing instruction cannot be applied as written. Employers should not independently change an instructed deduction without a proper basis.
Managing CP38 with a structured payroll system
A structured payroll process helps employers distinguish statutory contributions, monthly tax deductions and additional tax instructions. It also makes it easier to identify discrepancies before salary payments are finalised.
At hrmsystem.my, payroll features include automatic PCB, EPF, SOCSO and EIS calculations, together with payroll deductions and payslip management. These features can help organise payroll records, but employers must still verify CP38 instructions and ensure that the deduction and remittance follow LHDN's requirements.
Employers can also refer to the EPF, SOCSO and EIS contribution rates for 2026 and the EA form, C.P.8D and Form E guide when reviewing other payroll reporting responsibilities. Visit the guides index for additional payroll and HR information.
Frequently asked questions
Can an employer deduct CP38 without an LHDN instruction?
CP38 is based on a specific instruction from LHDN. Employers should verify the instruction and must not treat CP38 as an ordinary deduction that they can impose independently.
Are PCB and CP38 the same tax deduction?
No. PCB relates to monthly tax deductions for the current assessment year, while CP38 is an additional deduction instructed by LHDN to settle outstanding tax.
How should an employer report CP38 payments?
Employers should follow LHDN's applicable payment procedure and report the amounts in the separate PCB and CP38 fields provided in the relevant reporting process. Refer to current LHDN instructions if the reporting method or form has changed.
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