(Bloomberg) -- Hong Kong will raise the tax on high earners — the first increase in two decades — in a surprise move designed to lower the city’s fiscal deficit.

A two-tier tax system will be introduced from April, with income of up to HK$5 million ($640,000) taxed at a maximum of 15%, and anything higher than that being taxed at 16%. Currently tax for all individuals are capped at 15%.

The move will affect about 12,000 people, or about 0.6% of taxpayers, Financial Secretary Paul Chan said in his annual budget speech on Wednesday. 

Hong Kong is looking at ways to plug the hole in its budget, with the deficit for the year ending March 31 projected at HK$101.6 billion, almost double the estimate laid out a year ago. Yet increasing the tax on the high earners may deter finance workers at a time when the government is seeking to revive the industry and attract talent.

The move will bring in about HK$910 million of additional revenue each year, Chan said, adding that the new tax rate will still be lower than in other advanced economies.

“It’s a fair principle in many countries to let the high earner pay more instead of making a fundamental change to the entire tax system,” said William Chan, tax partner at Grant Thornton Hong Kong. “The impact of this two-tier tax system to high-income earners should be small.”

Hong Kong last raised the overall tax rate on salaries in 2003, when it was increased to 16%. The rate was cut back to 15% from 16% in 2008 after the city reported a record budget surplus. The city has no goods services tax or capital gains tax.

As the biggest landlord, the government has historically relied on land sales to bolster revenues. Yet a collapse in demand for housing and office space prompted the government to halt sales of residential land for the first time in 14 years, as well as commercial land. 

The government has reached only 23% of its annual targeted sale revenue of HK$85 billion with just one month left in the financial year, according to Chan. He removed all cooling measures on housing to boost the market in his Wednesday speech.

“Hong Kong has to navigate fiscal challenges amidst global economic shifts,” said Kher Sheng Lee, Asia-Pacific co-head of Alternative Investment Management Association, which represents hedge and private credit funds with more than $3 trillion under management. “This modest tax hike for high earners can be seen as a prudent step to maintain fiscal health without dimming the city’s appeal.”

While the tax increase is a marginal one, it’s still a surprise, said John Mullally, Hong Kong managing director of recruiting firm Robert Walters.

“The first reaction I have been getting from my network is that they didn’t expect this,” Mullally said. “For now, it’s not a significant enough increase to make most people to question whether they should be in Hong Kong.”

(An earlier version was corrected to note 15% was the maximum tax rate, fixed spelling of surname in last paragraphs.)

--With assistance from Adrian Kennedy, Bei Hu and Alan Wong.

(Updates to add quote in fourth last paragraph.)

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