Japan’s 2026 tax reform was passed by the House of Councillors on 31 March 2026. Among its most consequential changes are revisions to the individual income tax basic exemption and employment income deduction, effectively raising the "annual income wall" to JPY 1.78 million for 2026-27, and the introduction of a new Special Defence Income Tax.
This article summarises the key reforms and highlights critical considerations for global mobility programmes.
As the basic exemption for income tax previously remained frozen despite rising prices, ongoing inflation steadily eroded the real value of the exemption, resulting in an increase in the actual tax burden on taxpayers. To address this issue, the 2026 reform introduces an indexation mechanism that adjusts the basic exemption and other deductions in tandem with inflation.
Specifically, the statutory base of the basic exemption will now be adjusted by multiplying the pre-reform exemption amount by the rate of increase in the Consumer Price Index over the two years immediately preceding the tax reform. Under this mechanism, the statutory base is increased to JPY 620,000, up from JPY 580,000 in FY 2025.
Concurrently, as a measure applicable for calendar years 2026 and 2027, a special supplemental allowance applies depending on the taxpayer's "Total Shotoku Amount" (e.g., a statutory base of JPY 620,000 + a special supplement of JPY 420,000 = JPY 1,040,000). Consequently, the ultimate amount of the basic exemption will vary based on each taxpayer's Total Shotoku Amount category (see Table 1).
Table 1
The statutory base of JPY 620,000 for 2028 and thereafter remains subject to change based on future reviews linked to inflation although the 2026 reform does not specify the frequency or the methodology for such future adjustments. Furthermore, consistent with the FY 2025 reform, the basic exemption revision under the reform applies only to income tax—there is no change to the basic exemption for local inhabitant tax (which remains fixed at JPY 430,000). Employers will need to account for this discrepancy when conducting tax projections or advising assignees.
To align with inflation, the minimum guaranteed employment income deduction increases as follows:
Table 2
Combined Effect
For salaried employees, the tax-free threshold rises to JPY 1.78 million (JPY 1.04 million plus JPY 740,000) for 2026-2027. While this revision to the minimum guaranteed employment income deduction applies equally to local inhabitant tax for the corresponding years, the local inhabitant tax basic exemption remains unchanged. Consequently, payroll teams will need to account for the resulting discrepancy between the tax-free thresholds for income tax and local inhabitant tax.
The withholding tax tables for employment income will be revised, with the updated monthly (and daily) tables applying for payments made on or after 1 January 2027. Payroll teams will need to incorporate the revised basic exemption and employment income deduction into the 2026 year-end adjustment, even though the withholding tables will not update until 2027.
Effective 1 January 2027, Japan will introduce a new 1% Special Income Tax for defence, applied to the base income tax amount. Simultaneously, the current “Special Income Tax for Reconstruction” rate will be reduced from 2.1% to 1.1%, and its applicable period will be extended from 2037 to 2047 (see Table 3).
Table 3
Affected companies should consider the following actions:
BDO in Japan
This article summarises the key reforms and highlights critical considerations for global mobility programmes.
Increase to the Basic Exemption
As the basic exemption for income tax previously remained frozen despite rising prices, ongoing inflation steadily eroded the real value of the exemption, resulting in an increase in the actual tax burden on taxpayers. To address this issue, the 2026 reform introduces an indexation mechanism that adjusts the basic exemption and other deductions in tandem with inflation.Specifically, the statutory base of the basic exemption will now be adjusted by multiplying the pre-reform exemption amount by the rate of increase in the Consumer Price Index over the two years immediately preceding the tax reform. Under this mechanism, the statutory base is increased to JPY 620,000, up from JPY 580,000 in FY 2025.
Concurrently, as a measure applicable for calendar years 2026 and 2027, a special supplemental allowance applies depending on the taxpayer's "Total Shotoku Amount" (e.g., a statutory base of JPY 620,000 + a special supplement of JPY 420,000 = JPY 1,040,000). Consequently, the ultimate amount of the basic exemption will vary based on each taxpayer's Total Shotoku Amount category (see Table 1).
Table 1
| Total Shotoku Amount (all amounts are expressed in JPY) | 2025 | 2026-2027 | 2028 and thereafter |
| (Before 2026 reform) | (After 2026 reform) | (After 2026 reform) | |
| 1,320,000 or less | 950,000 | 1,040,000 | 990,000 |
| Over 1,320,000 – 3,360,000 | 880,000 | 620,000 | |
| Over 3,360,000 – 4,890,000 | 680,000 | ||
| Over 4,890,000 – 6,550,000 | 630,000 | 670,000 | |
| Over 6,550,000 – 23,500,000 | 580,000 | 620,000 | |
| Over 23,500,000 – 24,000,000 | 480,000 | 480,000 | 480,000 |
| Over 24,000,000 – 24,500,000 | 320,000 | 320,000 | 320,000 |
| Over 24,500,000 – 25,000,000 | 160,000 | 160,000 | 160,000 |
| Over 25,000,000 | 0 | 0 | 0 |
The statutory base of JPY 620,000 for 2028 and thereafter remains subject to change based on future reviews linked to inflation although the 2026 reform does not specify the frequency or the methodology for such future adjustments. Furthermore, consistent with the FY 2025 reform, the basic exemption revision under the reform applies only to income tax—there is no change to the basic exemption for local inhabitant tax (which remains fixed at JPY 430,000). Employers will need to account for this discrepancy when conducting tax projections or advising assignees.
Increase to the Minimum Guaranteed Employment Income Deduction
To align with inflation, the minimum guaranteed employment income deduction increases as follows:
- Statutory base: JPY 650,000 to JPY 740,000;
- Temporary supplement (2026-2027): + JPY 50,000.
- Total minimum deduction for 2026 and 2027: JPY 740,000 (i.e., the JPY 690,000 statutory base plus the JPY 50,000 special supplement). There are no changes to the employment income deduction for individuals with gross employment income exceeding JPY 2.2 million.
Table 2
| Gross employment income (all amounts are expressed in JPY) | Employment Income Deduction Amount | ||
| 2025 (Before 2026 reform) |
2026-2027 (After 2026 reform) |
2028 and thereafter (After 2026 reform) |
|
| 1,900,000 or less | 650,000 | 740,000 | Income × 30% + 80,000 (if less than 690,000, then 690,000) |
| Over 1,900,000 -2,200,000 | Income × 30% + 80,000 | ||
Combined Effect
For salaried employees, the tax-free threshold rises to JPY 1.78 million (JPY 1.04 million plus JPY 740,000) for 2026-2027. While this revision to the minimum guaranteed employment income deduction applies equally to local inhabitant tax for the corresponding years, the local inhabitant tax basic exemption remains unchanged. Consequently, payroll teams will need to account for the resulting discrepancy between the tax-free thresholds for income tax and local inhabitant tax.
Payroll Calculation Impact
The withholding tax tables for employment income will be revised, with the updated monthly (and daily) tables applying for payments made on or after 1 January 2027. Payroll teams will need to incorporate the revised basic exemption and employment income deduction into the 2026 year-end adjustment, even though the withholding tables will not update until 2027.
Special Income Tax for defence
Effective 1 January 2027, Japan will introduce a new 1% Special Income Tax for defence, applied to the base income tax amount. Simultaneously, the current “Special Income Tax for Reconstruction” rate will be reduced from 2.1% to 1.1%, and its applicable period will be extended from 2037 to 2047 (see Table 3).Table 3
| Type of tax | Tax rate | Applicable period | Total tax rate | |
| Before reform | Special Income Tax for Reconstruction | 2.1% | Until 2037 | 2.1% |
| After reform | Special Income Tax for Reconstruction (2027 onwards) | 1.1% | Until 2047 | 2.1% |
| Special Income Tax for defence (2027 onwards) | 1% | 2027 (for the time being) | ||
Impact on Global Mobility
The revisions to the basic exemption and employment income deduction, along with the introduction of the Special Income Tax for defence, will materially affect Hypothetical Tax (Hypo Tax) and tax equalisation frameworks commonly used in global mobility programmes.Affected companies should consider the following actions:
- Update system logic to reflect new exemption and deduction thresholds.
- Recalculate Hypo Tax for active assignees.
- Adjust withholding tax projections for inbound/outbound moves.
- Update tax equalisation formulas used for year-end reconciliations.
- Review policy language. If your policy references only Special Income Tax for Reconstruction,” it must be amended to explicitly include the new Special Income Tax for Defense.
BDO in Japan