Clarification of Japanese tax and its relation to gross income

Do you ever get frustrated or worried about what seems to look like a very complicated tax system, especially if they are all written in Japanese? Well, while the tax system itself is something challenging to comprehend even for Japanese residents, we will break down each component of the payment slip and together, let’s learn about the tax system of Japan!

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1.What is the Japanese tax system like for foreign residents?

Firstly, to briefly introduce the tax system in Japan, Japanese taxes are divided into National and Local Taxes, depending on to whom the tax is paid.

For example, National Taxes are taxes paid to the national government, such as Individual Income Tax, whereas taxes paid to the prefectural or municipal government, such as Individual Inhabitant Tax, are identified as Local Taxes.

As for non-permanent residents in Japan, a person who earns an income in Japan must pay individual income tax and residents who have a registered home address in Japan must pay individual inhabitant tax.

2. A closer look into the pay slip

To put it very simply, the Japanese pay slip can be divided and organized into three categories which are (1)attendance (2)salary (3)deductions.

Basically, attendance shows the number of days actually worked, including days worked, days missed, and overtime, whereas salary shows the amount paid by the employer such as  basic salary, overtime pay, and job allowance.

Deductions include the money which would be pulled from the salary such as social insurance, health insurance, and income taxes. Therefore, the actual amount which one would get at the end of each month is salary minus the deduction. 

3. Full explanation on salary

First of all, basic salary is the base amount of salary paid by the company, not including commuting allowance, overtime allowance, or other special compensation.

In addition to the basic salary, the employees may receive a housing allowance where the company pays a portion of the employee's rent or mortgage. Furthermore, one must imagine riding on trains everyday to commute to work when thinking of working in Japan, which is right.

Therefore, the majority of companies give commuting allowance, an allowance for transportation costs incurred when commuting to and from work to their workers.

Furthermore, while this might give you negative views about working in Japan, there is also an overtime allowance which is the amount for overtime work outside of the working hours stipulated in the employment contract.

The overtime allowance is usually calculated as follows: "unit price per hour multiply overtime hours x 1.25% premium rate for legal overtime work.” 

4. Clarification on tax

Concerning tax for foreign residents, there are two major taxes which one must pay: income tax and residential tax.

Income tax is tax on salaries received from companies and money earned by doing business by yourself. (Information obtained from the Ministry of Finance) The resident tax is tax that must be paid to the local municipal office for foreigners having a domicile within Japan as of January.

There are two types of tax: the municipal residents' tax and the prefectural residents' tax. The tax rates may slightly differ depending on which city/prefecture you live in.

(Information obtained from Internal Affairs and Communications.)

Residential tax will be calculated on the basis of your previous year’s income in Japan. Therefore, one will not be required to pay for the first year if you lived abroad the previous year. One will be required to pay from next January, the amount calculated on the basis of your annual gross income of the previous year. 

5. All about deductions

The deduction section contains the amount of insurance premiums and taxes which need to be paid from health to social insurance. 

1. Health Insurance 

The purpose of health insurance, as can be predicted by the name, is to ensure that everyone can receive medical treatment in case of injury or illness. Those who are enrolled in the insurance program pay a certain amount of money based on their income to gather a collective amount of money which will be used to share the burden of medical treatment fees.

This thick health insurance can be said as one of the unique and beneficial systems in Japan which other countries such as America might lack. For example, Japan offers a High-Cost Medical Expense Benefit, which is a refund you can receive after paying a high-cost medical expense at a medical facility.

The medical expenses covered by this high-cost medical care benefit are limited to those paid at a single medical institution for a month amounting to 21,000 yen or more. Therefore, one will not be doomed into a crisis of debt even if one gets a heavy illness or injury. 

2. Pension 

   According to Japan Pension Service, the public pension system was established with the intention of all working people coming together to help those who are in need, such as the elderly, those who are disabled as a result of disease or accident, and surviving family members whose primary wage earner has passed away. 

(reference: https://www.nenkin.go.jp/international/japanese-system/overview/overview.html) 

The National Pension, which covers all individuals between the ages of 20 and 59, and Employees' Pension Insurance, which includes employees of businesses and the public sector, make up the two tiers of the public pension system.

Pensions are available to people of all ages. When in need, even young people are eligible to receive the survivors' or disability income. The pension system is vital since it helps the working population, young people, and the elderly maintain their standard of living. 

3. Employment Insurance

Unemployment insurance is designed to provide "unemployment and other benefits" in lieu of salary for approximately three months to one year when company employees or qualifying short-time workers resign or become unemployed. Unemployment insurance premiums refer to the premiums for unemployment insurance, which are paid by both the employee and the employer.　

4. Social Insurance (Total sum of a,b,c) 

Social insurance premiums refer to the premiums charged for social insurance. Typical examples are medical (health) insurance, employee pension insurance, long-term care insurance, unemployment insurance, and workers' compensation insurance.

Social insurance is a public insurance system that we are obliged to join in order to ensure our livelihood. By enrolling in social insurance, we can receive benefits when we encounter situations that cause difficulties in our lives, such as illness, injury, or unemployment.

6. What you can do with what is left

It is crucial that one calculates all what is left in their hands in order to make the greatest out of one’s gross income. First, one should calculate all the housing expenses, communication fees, living expenses and see how much they can really use for their own habits and leisure.

While at this point, one may have pessimistic views toward the amount which they can use freely, please do not feel disappointed since many Japanese corporations regardless of size offer numerous benefits which can help their employees raise their standard of living. For example, companies offer their employees a membership to gyms or yoga classes. Another example might be offering monthly fees to their employees so that they could try out new hobbies such as golfing or fishing.

Furthermore, one must not forget that through the benefits, the companies will assist you by giving allowance for living expenses such as commuting fees. If you are ever lost in calculating and figuring out how to manage money in Japan, please check out our “Costs in Japan'' post to gain further information. 

7. What should one do to actually work in Japan?

Needless to say, all of these worries about the Japanese tax system would not even arise if one cannot get a job in Japan. However, due to lacking working forces and the need to expand business to a global field, countless Japanese companies are now looking for foreign talents which can bring a new light into their company.

Thus, when deciding to do job hunting in Japan, please make sure to assess the company from numerous angles such as from the viewpoint of salary, benefits, skills which can be gained in the company, and whether it is rewarding for you.

We also recommend for you to read “How to prepare for job hunting in Japan”  which can assist you in making your first steps of job hunting. 

8. Final Note

We hope that through this article, you were able to deepen your understanding of the Japanese tax system, which should not be as confusing if we break down each category and organize them carefully.

While the negative points such as the deductions may stand out to you, we want to remind you that because of deductions such as the health insurance, there would be less to worry even if you get a significant injury or illness.

Since these insurances are initially made for us to be protected, let’s not be pessimistic, and understand what we are paying for so that we can make future plans on how to spend our savings and lead a more fulfilling life!