Japan’s tax year runs from 1 January to 31 December and income tax is payable at a national, prefectural and municipal level.
Tax Status
Foreigner taxpayers fall into one of three possible categories:
- Non-permanent resident. Those who have lived in Japan for less than 5 years out of the last 10 years.
- Permanent resident. Those who have lived in Japan for more than 5 years out of the last 10 years.
- Non-resident. Anyone who does not fit in either of the categories above.
Your status determines the extent to which income from abroad is taxable in Japan. Your total taxes paid (both in your home country and Japan) will be determined by tax treaties between the countries.
Income Tax (National)
Like the UK and the US, Japan operates a progressive tax system where your tax rate increases with your income. As of 2015, the following tax brackets apply.
| Taxable income | Tax rate | Deduction |
|---|---|---|
| <ÂĄ1.95 million | 5% | Zero |
| ÂĄ1.95-3.3 million | 10% | ÂĄ97,500 |
| ÂĄ3.3-6.95 million | 20% | ÂĄ427,500 |
| ÂĄ6.95-9 million | 23% | ÂĄ636,000 |
| ÂĄ9-18 million | 33% | ÂĄ1,536,000 |
| >ÂĄ18 million | 40% | ÂĄ2,760,000 |
So, for example, a single taxpayer with a taxable income of ÂĄ8 million would fall in the 23% tax bracket and pay ÂĄ1.204 million in taxes.
ÂĄ8M x 23% = ÂĄ1.84M – ÂĄ0.636M = ÂĄ1.204M
It is a bracket system and the amounts in the deduction column are simply the taxes that result from the brackets above. We can calculate the tax payable on a taxable income of ÂĄ8 million another way:
| Bracket | Amount | Tax | Remaining |
|---|---|---|---|
| 5% | ÂĄ1,950,000 | ÂĄ97,500 | ÂĄ6,050,000 |
| 10% | ÂĄ1,350,000 | ÂĄ135,000 | ÂĄ4,700,000 |
| 20% | ÂĄ3,650,000 | ÂĄ730,000 | ÂĄ1,050,000 |
| 23% | ÂĄ1,050,000 | ÂĄ241,500 | ÂĄ0 |
And the sum of the figures in the tax column equals ÂĄ1.204 million.
What is “taxable income” and what deductions are allowed?
Well, you get a living expense deduction based on your income.
| Total income | Allowed deduction |
|---|---|
| <ÂĄ1.8 million | Total income x 40% or ÂĄ650,000 |
| ÂĄ1.8-3.6 million | Total income x 30% + ÂĄ180,000 |
| ÂĄ3.6-6.6 million | Total income x 20% + ÂĄ540,000 |
| ÂĄ6.6-10 million | Total income x 10% + ÂĄ1,200,000 |
| ÂĄ10-15 million | Total income x 5% + ÂĄ1,700,000 |
| >ÂĄ15 million | ÂĄ2,450,000 |
Further, all taxpayers, regardless of their level of income, are entitled to a ÂĄ380,000 basic deduction so if your gross income is ÂĄ8 million your taxable income is actually ÂĄ5.62 million.
ÂĄ8MM – (ÂĄ8MM x 10% + ÂĄ1.2MM) – ÂĄ0.38MM = ÂĄ5.62MM
Certain other expenses such as health insurance and travel expenses are also tax deductible (most Japanese companies pay for their employees’ commuter pass) and the system gets more complicated if you’re self-employed, but the above are the main deductions for individuals.
What if I have dependents?
If your spouse does not work then you can also claim your spouse’s basic deduction of ÂĄ380,000 against you own salary. If your spouse does work then it depends on their level of earnings.
There has been quite a bit of fuss in recent times around what is referred to as the ¥1.03 million barrier. ¥1.03 million is the total of the ¥650,000 amount before tax is payable and the ¥380,000 basic deduction—it is the maximum amount that can be earned without paying any taxes. The issue is that if either spouse earns less than this amount they are still deemed a dependent of the other for tax purposes, and as a dependent the basic deduction amount can transfer to the main earner. All well and good. But the breadwinner can also claim the ¥380,000 against their own salary, meaning that such couples get a “triple deduction” because the main earner claims ¥760,000 and their spouse claims ¥380,000—a total basic deduction of ¥1.14 million.
The current system was introduced in 1961 to support the average family at a time when women were expected to stay at home whilst the husband laboured in the office. However, as times have changed the voices that claim this system is out-dated have been growing.
Following a change in the law in 2011 those with children under the age of 16 years can no longer claim any tax deduction. For children over 16 years old the amount is ÂĄ380,000 per child; 16-22 years old and that rises to ÂĄ630,000 before coming back down to ÂĄ380,000 if they are still a dependent after 23 years of age.
Residence Tax (Prefectural & Municipal)
Prefectural and municipal taxes are collectively referred to as Residence Tax (jĹ«min-zei, 住民税). In total this amounts to 10% (6% prefectural; 4% municipal) of your prior year’s taxable income.
