Salary and Taxes in Japan
One of the questions I often got as a guide was how much salary regular people make in Japan. Japan has boasted strong economic growth after WW2 and Japan was ranked number two in the world in terms of economic power in 1968, and it continued to keep that rank for 42 years until China surpassed Japan in 2009. The wages of employees also increased accordingly. But alas, the high didn’t last forever. Nominal wages have been slightly increasing, but the real wage hasn’t changed for almost 30 years since the economic bubble burst in the early 1990s. How much does the average Japanese person earn now? And how much of that is withheld in taxes and premiums every year?
Income Taxes in Japan
The average annual income for salaried workers in Japan is about 4,200,000 JPY, which is about 40,000 USD. This amount includes bonuses that are supposed to be flexible pay but are almost always paid in reality. This amount is the gross amount before taxes have been deducted. So how much will be withheld from gross salaries in Japan by the time it ends up in an employee’s bank account?
Firstly, you have to pay income tax according to the amount of your income. There are two governmental bodies that collect income tax. One is the national government, and the other one is the prefecture/city. The national government calculates your tax burden with a progressive scale. If your income is less than 1,950,000 yen, you only pay 5%, and that percentage goes up to 10%, 20%, 23%, 33%, 40%, 45% once your income goes over certain limits. You will reach the 45% bracket once your income is over 40,000,000 yen. But even if your income is 40,000,000 yen, your tax is not 18,000,000 yen exactly (40,000 x 0.45). This is because the first 1,950,000 yen you make is still only taxed at 5%, and the next increment at 10%, and so on. The actual amount of tax you would pay if you would have a 40,000,000 yen income is 15,450,000 yen.
Then there are the local taxes or inhabitant tax. Inhabitant tax consists of prefecture tax and city tax. They differ according to the city you live in, but generally, the total amount of inhabitant tax is roughly 10% of your income irrespective of the amount of your salary. This tax is added to the national tax.
This sounds like the tax burden in Japan is very high. It indeed isn’t low compared to, for example, the US, but there are many deductions of life expenses that can be made to lower your tax bill such as life insurance, medical expenses that go over 100,000 yen per year, and having a dependent spouse and/or children, so the actual calculation is a bit more complicated. If you just want to get a general idea of how much tax someone would pay without keeping deductions in mind, this tax calculator is a good tool.
If you suddenly lose your job, it is great if you can at least get a part of your income from the government until you find a new job. Some European countries have extensive systems for this eventuality and also the US has unemployment insurance, and in Japan this is no different. Additionally, this employment insurance also pays out if you have to temporarily leave your job to take care of your children or if you participate in a vocational education program.
That sounds pretty good, doesn’t it? There are some limitations, though; if you become unemployed but aren’t actively looking for new employment, you don’t qualify for unemployment payouts. Also, you have to have paid the premiums for at least one year before you can qualify. If you apply for unemployment payouts, you will receive the payouts for 90 to 330 days, depending on your age and the length of the period you paid the premiums for. The amount of the payout depends on your last-earned wage, and there is a limit to the amount. Often, the payout will be much less than the wage that you received from the company, but at least it can pay for your daily necessities for a while.
The premium for unemployment insurance is 0.3% of your income, and your company will have to add an extra 0.6% on top of that.
Social Insurances in Japan
And that was not all, because there are also social premiums to be paid. In Japan, it is mandatory for everyone to join a health insurance program. If you are in the program, when you go to a doctor, dentist, or hospital, you only need to pay 30% of the medical fee, and the other 70% is covered by your health insurance. If you are a business owner, freelancer, or unemployed/not working, you have to join the government-provided national health insurance program. There is an exception for dependent spouses, as they can be covered under their working spouse’s insurance for free. If you are an employee, half of the amount of health insurance premiums have to be paid for by the company. The premium differs according to the prefecture, but basically, it is about 10% of your income.
You also need to join one of the mandatory pension programs. If you are a business owner, freelancer, or unemployed/not working, you have to join the national pension plan. If you are a company employee, you join the employees’ pension plan which consists of the national pension plan and an employee pension insurance. Larger companies have their own pension system and smaller companies use the public pension organization for the employee pension insurance part. The premium is about 18% of your income, and half of that amount is paid for by the company.
A special program called nursing care insurance only started in 2000 to deal with the fast-rising expenses of Japan’s super-aging society. You have to start paying a premium when you become 40 years old and you have to continue the payment until the end of your life. The premium depends on your income and runs between about 20,000 yen to 430,000 yen. The company pays half of the premium. When you start using nursing-care service, there are 6 categories depending on your health status. This insurance will support 10% to 30% of your nursing-care expenses, the amount depending on your income.
So How Much Tax Do Japanese Pay?
So how much tax do you eventually have to pay? Let’s see an example of someone with the average annual income of a Japanese salaried worker, which is about 4,200,000 yen per year. In this case, the total amount of taxes and premiums that are withheld will amount to around 20% of the income, coming up to a bit more than 800,000 yen per year.
If you are a freelancer or business owner, the amount of taxes you owe on your income after deduction of business expenses is a little bit higher than for salaried workers. This is why, also in Japan, it is important to hire a good accountant if you work for yourself.
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