AS Malaysia prepares for Budget 2027, much of the attention will be on economic growth and fiscal sustainability.

However, it is also an opportunity to make the country’s tax system work better for ordinary Malaysians who are facing higher living costs, evolving careers and new workplace demands.

Equally important is how the tax system can support households, encourage workforce participation and help Malaysians adapt to a rapidly changing economy.

Policymakers should consider measures that increase disposable income, simplify tax reliefs, and support digital and artificial intelligence (AI) upskilling to help create a tax framework that is fairer, easier to navigate and better suited for the future.

Helping Malaysians keep more of what they earn

Under the progressive tax system for individuals, a Malaysian tax resident individual’s income tax rates range from 0% to 30% depending on the income band.

While a progressive tax system remains important, many middle-income earners have received salary increments in recent years, only to find that rising housing, food and transportation costs leave them feeling no better off than before as they become increasingly affected by “bracket creep”.

This occurs when salary increments aimed at keeping pace with inflation move taxpayers into higher tax brackets, thereby increasing their effective income tax rates.

In such cases, taxpayers may see little improvement in their real purchasing power despite earning more.

This effectively weakens the intended benefit of wage adjustments, as a larger proportion of income is paid in tax rather than being available to support household spending.

A review of Malaysia’s income tax bands can help address this issue.

By widening income ranges before higher tax rates apply, taxpayers will be able to retain a larger share of their earnings.

This will increase household disposable income, support consumer spending and encourage career progression and higher productivity.

As private consumption remains a key engine for economic growth, allowing households to keep more of their earnings can generate positive benefits across the wider economy.

Any adjustments will need to be balanced against the government’s fiscal objectives.

However, targeted reforms can help ease cost-of-living pressures while maintaining revenue sustainability.

Simplifying tax reliefs for today’s needs

Malaysia’s tax relief framework has expanded considerably over the years.

Currently, taxpayers can claim relief for a wide range of expenditures, including education, healthcare, retirement savings, childcare and lifestyle purchases.

While these reliefs provide valuable support, navigating them has become increasingly complex.

Taxpayers must track multiple claim limits, keep extensive records and determine where each expense fits.

Rather than introducing more relief categories, Budget 2027 should focus on simplifying existing ones.

One option is a broader “Personal Development Relief” that brings together books, professional subscriptions, training programmes, technical certifications, online learning resources and digital productivity tools under a single category.

This would make the system easier to understand while giving taxpayers greater flexibility to claim expenses that are reflective of their individual needs.

Similar consolidation can be applied to other areas.

Medical-related claims can be grouped under a “Health and Wellness Relief”, while childcare expenses, parental care and support for dependants can come under “Family Support Relief”.

Simplification does not mean reducing available reliefs.

Instead, it can make them more accessible and relevant to modern Malaysian households.

Supporting Malaysians in the AI economy

One of the most significant workplace trends today is the growing importance of AI skills.

Across industries, employees are increasingly using AI-powered tools to conduct research, analyse data, automate routine tasks and improve productivity.

AI is no longer confined to technology specialists. It is becoming a core resource for workers across industries.

As a result, many Malaysians are investing their own funds in AI courses, data analytics programmes, professional certifications and productivity tools to upgrade their capabilities outside formal employer-sponsored training programmes.

These expenses should be viewed as investments in employability and career development.

Budget 2027 presents an opportunity to recognise this reality.

Rather than creating separate AI incentives, the costs of AI-related learning and productivity tools can be incorporated into a broader Personal Development Relief.

Such an approach encourages continuous learning, while keeping the tax system simple.

It also aligns with Malaysia’s ambition to build a knowledge-based, innovation-driven economy capable of competing in an increasingly digital world.

Making tax filing easier

Malaysia’s tax administration is becoming more digital through initiatives such as e-invoicing and the MyTax platform.

These developments make tax filing faster, more accurate and less burdensome for taxpayers.

The next step can be greater use of pre-filled tax returns through integration with retirement savings, insurance and e-Invoice data.

Budget 2027 should also consider a simplified filing approach for low-risk salaried taxpayers and AI-powered guidance within MyTax to help identify common errors before tax returns are submitted.

The goal should be more than efficient tax collection. It should be a better taxpayer experience that is simple, transparent and user-friendly.

Looking ahead

A successful tax system is not measured solely by how efficiently it collects revenue.

It is also defined by whether taxpayers can understand it, comply with it easily and see that it reflects the realities of modern life.

As Malaysia looks ahead to Budget 2027, there is an opportunity to create a simpler, smarter tax system that supports household finances, encourages lifelong learning and prepares Malaysians for an increasingly digital and AI-driven economy.

A tax system that is easier to understand, rewards continuous learning and reflects the realities of modern work will do more than improve compliance.

It will help Malaysians build financial resilience, adapt to change and participate more confidently in the country’s future growth.

Irene Ang is Malaysia People Advisory Services Leader; and Partner, Ernst & Young Tax Consultants Sdn Bhd, and Choong Zhen Han is Director, Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writers’ own.