Through the year, the employer withholds income tax from each salary and bonus using tables that only approximate the final liability. In November and December, employees submit forms declaring dependants, life and earthquake insurance premiums, private pension contributions and mortgage interest. The employer then works out the actual tax for the year and adjusts it in the last pay of the year, usually as a refund. For most employees, that is the end of their tax obligation.
The adjustment is the employer's legal duty, not a courtesy. It applies to employees who submitted the dependant declaration to that employer, and whose annual salary does not exceed 20 million yen. Employees who earn more, have significant other income such as rental income or foreign investment income, or want to claim medical expenses or donations file their own return in February and March.
The year-end adjustment for 2026 carries an unusual step. The 2026 tax reform raised the basic deduction and the minimum employment income deduction for 2026, taking the income-tax threshold for a salaried person to 1.78 million yen, but the change took effect only from 1 December 2026. Tax withheld from January to November was calculated under the old rules, and the difference is settled in the December adjustment.
What it means for a foreign employer
- Payroll has to be able to do it. A small Japanese subsidiary using a global payroll provider needs one that runs the Japanese adjustment properly, including the forms.
- Senior hires usually file their own return. Anyone above 20 million yen, and most people with equity awards from a foreign parent, file personally. Consider paying for tax advice in the package.
- Leavers are adjusted differently. Employees who leave mid-year are not adjusted by the old employer and settle with the next employer or by filing a return.
- Expect larger December refunds in 2026. The deduction change means many employees will see a noticeable refund this December.
Sources
- Income Tax Act, Articles 190, 194 and 121.
- National Tax Agency, guidance on the year-end adjustment and on the 2025 and 2026 tax reforms.