Japan’s 2025 tax reform made changes to the amounts of personal exemptions, such as the basic exemption and the dependent exemptions for individual income tax.
For the basic exemption, the exemption amount for individuals with a total taxable income (“Shotoku”[①] in Japanese) of JPY 23.5 million or less has been raised from JPY 480,000 to JPY 580,000. Additionally, for the two-year period from 2025 to 2026 only, a "special basic exemption" will apply to individuals with total taxable income of JPY 6.55 million or less (see Table 1).
Regarding the exemption for dependents aged 19-22 who share a household with their parents, if the taxable income of the dependent aged 19-22 is JPY 580,000 or less (JPY 1.23 million or less of gross income when their income is solely from employment), the Specified Dependent Relative Exemption amount is JPY 630,000. A new exemption has been established for dependents aged 19-22 whose taxable income is over JPY 580,000 but less than JPY 1.23 million (over JPY 1.23 million yen but less than JPY 1.88 million of gross income if their income is solely from employment), allowing for a phased application of an exemption up to a maximum of JPY 630,000 (see Table 2).
These revisions will generally take effect on 1 December 2025 and will apply to income tax for 2025 and subsequent years. The impact of these changes on Japanese payroll procedures is discussed below.
Because this revision takes effect on 1 December 2025, there will be no changes to the payroll procedures for 2025 salaries until November 2025. Monthly tax amounts will be calculated based on the "pre-revision" withholding tax tables. During the year-end adjustment[②] to be performed in December 2025, the annual tax amount will be calculated based on the "post-revision" basic exemption amount, and an adjustment will be made with the withholding tax amount calculated using the pre-revision withholding tax tables.
Thus, employers need employees to confirm whether they are newly eligible for exemptions due to the revisions. As mentioned earlier, the applicable exemption changes depend on the dependent's income. Employees should be required to submit one of the following appropriate application forms to the employer by the time of the year-end adjustment:
Starting with withholding tax for 2026 salaries, monthly withholding tax calculations will proceed based on the post-revision withholding tax tables. However, these monthly tables do not incorporate the "Special Basic Exemption" and a part of the "Special Exemption for Specified Relatives."
For individuals with a total taxable income of JPY 6.55 million or less, only the JPY 580,000 basic exemption will be reflected at the withholding stage. These individuals will receive the special basic exemption according to their income amount during the year-end adjustment.
For individuals who have dependents aged 19-22 as of 1 January 2026, the following points require attention regarding how to complete the "2026 Application for Exemption for Dependents of Employment Income Earner":
For example, if a husband departs from Japan in the middle of the year, whether the child qualifies as a specified relative for him is determined based on the situation on the date of his departure. Even if the child qualifies as a specified relative and the husband applied the special exemption for specified relatives, if the child still qualifies as a specified relative for his wife as of 31 December, the wife can also apply the special exemption for specified relatives in her year-end adjustment.
However, when applying the special exemption for specified relatives for 2025 income tax, special attention is required because the effective date is "on or after 1 December 2025," meaning the treatment differs depending on whether the departure is before 1 December 2025 or after 30 November 2025.
The 2025 tax reform includes measures to adjust the tax burden in response to price increases and to support employment. These measures include an increase in the basic exemption amount for income tax and the establishment of new exemption systems for dependents aged 19-22.
Yasutake Hirano
BDO in Japan
For the basic exemption, the exemption amount for individuals with a total taxable income (“Shotoku”[①] in Japanese) of JPY 23.5 million or less has been raised from JPY 480,000 to JPY 580,000. Additionally, for the two-year period from 2025 to 2026 only, a "special basic exemption" will apply to individuals with total taxable income of JPY 6.55 million or less (see Table 1).
Regarding the exemption for dependents aged 19-22 who share a household with their parents, if the taxable income of the dependent aged 19-22 is JPY 580,000 or less (JPY 1.23 million or less of gross income when their income is solely from employment), the Specified Dependent Relative Exemption amount is JPY 630,000. A new exemption has been established for dependents aged 19-22 whose taxable income is over JPY 580,000 but less than JPY 1.23 million (over JPY 1.23 million yen but less than JPY 1.88 million of gross income if their income is solely from employment), allowing for a phased application of an exemption up to a maximum of JPY 630,000 (see Table 2).
These revisions will generally take effect on 1 December 2025 and will apply to income tax for 2025 and subsequent years. The impact of these changes on Japanese payroll procedures is discussed below.
Payroll Procedures for 2025 Salaries
Because this revision takes effect on 1 December 2025, there will be no changes to the payroll procedures for 2025 salaries until November 2025. Monthly tax amounts will be calculated based on the "pre-revision" withholding tax tables. During the year-end adjustment[②] to be performed in December 2025, the annual tax amount will be calculated based on the "post-revision" basic exemption amount, and an adjustment will be made with the withholding tax amount calculated using the pre-revision withholding tax tables.Thus, employers need employees to confirm whether they are newly eligible for exemptions due to the revisions. As mentioned earlier, the applicable exemption changes depend on the dependent's income. Employees should be required to submit one of the following appropriate application forms to the employer by the time of the year-end adjustment:
- If the taxpayer has a dependent who is eligible for the Specified Dependent Relative Exemption (a dependent aged 19-22 with gross employment income of JPY 1.23 million or less), employees must submit to the employer a "2025 Application for (Change in) Exemption of Dependents of Employment Income Earners" stating this fact.
- If the taxpayer has a dependent eligible for the Special Exemption for Specified Relatives (a dependent aged 19-22 with gross employment income over JPY 1.23 million but equal to JPY 1.88 million yen or less), employees must submit to the employer an "Application for Special Exemption for Specified Relatives of Employment Income Earner."
Payroll Procedures for 2026 Salaries
Starting with withholding tax for 2026 salaries, monthly withholding tax calculations will proceed based on the post-revision withholding tax tables. However, these monthly tables do not incorporate the "Special Basic Exemption" and a part of the "Special Exemption for Specified Relatives."For individuals with a total taxable income of JPY 6.55 million or less, only the JPY 580,000 basic exemption will be reflected at the withholding stage. These individuals will receive the special basic exemption according to their income amount during the year-end adjustment.
For individuals who have dependents aged 19-22 as of 1 January 2026, the following points require attention regarding how to complete the "2026 Application for Exemption for Dependents of Employment Income Earner":
- If the estimated taxable income of a dependent aged 19-22 as of January 1, 2026 is JPY 580,000 or less (gross employment income of JPY 1.23 million or less): This dependent falls under the category of a specified dependent relative. Therefore, their information must be entered in the "Dependent relatives qualified for deduction" section of the application, and the "Specified Dependent Relative" box must be checked.
- If the estimated taxable income of a dependent aged 19-22 as of 1 January 2026 is over JPY 580,000 yen but JPY 1.23 million or less (gross employment income over JPY 1.23 million but JPY 1.88 million or less): Whether the special exemption for specified relatives can be applied at the withholding stage in advance, or at the year-end adjustment stage, will vary depending on the dependent’s estimated taxable income amount.
- If the taxable income amount is over JPY 580,000 but JPY 1 million or less (gross employment income over JPY 1.23 million but JPY 1.65 million or less): It is possible to apply the special exemption for specified relatives at the withholding stage in advance. The "Specified Relative" box in the Application must be checked for such application.
- If the taxable income amount is over JPY 1 million but JPY 1.23 million or less (gross employment income over JPY 1.65 million but JPY 1.88 million or less): The special exemption for specified relatives will be applied at the year-end adjustment stage. It should not be entered in the Application for Exemption for Dependents of Employment Income Earner. The exemption can be received by submitting the "Application for Special Exemption for Specified Relatives of Employment Income Earner" during the 2026 year-end adjustment.
Midyear Departure From Japan
The special exemption for specified relatives can, in principle, be applied to only one spouse -- either the husband or the wife -- in the case of dual-income couples. However, the Basic Income Tax Circular states that "even if an individual was exempted as a specified relative of a resident who died or departed from Japan in the middle of the year, if that individual also qualifies as a specified relative of another resident within the same year, the other resident may claim them as their own specified relatives" (Income Tax Basic Circular 83 - 84-2-1).For example, if a husband departs from Japan in the middle of the year, whether the child qualifies as a specified relative for him is determined based on the situation on the date of his departure. Even if the child qualifies as a specified relative and the husband applied the special exemption for specified relatives, if the child still qualifies as a specified relative for his wife as of 31 December, the wife can also apply the special exemption for specified relatives in her year-end adjustment.
However, when applying the special exemption for specified relatives for 2025 income tax, special attention is required because the effective date is "on or after 1 December 2025," meaning the treatment differs depending on whether the departure is before 1 December 2025 or after 30 November 2025.
Conclusion
The 2025 tax reform includes measures to adjust the tax burden in response to price increases and to support employment. These measures include an increase in the basic exemption amount for income tax and the establishment of new exemption systems for dependents aged 19-22.Other revisions include an increase in the minimum guaranteed amount of the employment income deduction and the relaxation of income requirements for the single parent exemption and spousal exemption.
BDO Tax Co. can provide Japanese individual income tax compliance services as well as advisory services based on your specified needs.
For more information on the payroll implications of the tax reform, please consult your regular BDO contact or the author of this article.
BDO Tax Co. can provide Japanese individual income tax compliance services as well as advisory services based on your specified needs.
For more information on the payroll implications of the tax reform, please consult your regular BDO contact or the author of this article.
| Taxpayer's Own Total Taxable Income (in JPY) |
Exemption amount (in JPY) | ||
| Present | 2025 and 2026 | 2027 and later | |
| 0~1,320,000 | 480,000 | 950,000 | 950,000 |
| 1,320,001~3,360,000 | 880,000 | 580,000 | |
| 3,360,001~4,890,000 | 680,000 | ||
| 4,890,001~6,550,000 | 630,000 | ||
| 6,550,001~23,500,000 | 580,000 | ||
| 23,500,001~24,000,000 | 480,000 | 480,000 | |
| 24,000,001~24,500,000 | 320,000 | 320,000 | 320,000 |
| 24,500,001~25,000,000 | 160,000 | 160,000 | 160,000 |
| 25,000,001~ | 0 | 0 | 0 |
| Total Taxable Income of Dependents aged 19-22 (in JPY) | Exemption amount (in JPY) | ||
| Income tax | Local Inhabitant tax | ||
| Specified dependent relative exemption | 0~580,000 | 630,000 yen | 450,000 |
| Special exemption for specified relatives (New) |
580,001~850,000 | 630,000 | 450,000 |
| 850,001~900,000 | 610,000 | 450,000 | |
| 900,001~950,000 | 510,000 | 450,000 | |
| 950,001~1,000,000 | 410,000 | 410,000 | |
| 1,000,001~1,050,000 | 310,000 | 310,000 | |
| 1,005,001~1,100,000 | 210,000 | 210,000 | |
| 1,100,001~1,150,000 | 110,000 | 110,000 | |
| 1,150,001~1,200,000 | 60,000 | 60,000 | |
| 1,200,001~1,230,000 | 30,000 | 30,000 | |
Yasutake Hirano
BDO in Japan
[①] “Shotoku” refers to an income net of applicable deduction for that income type. Under Japanese tax law, income is categorised into 10 different types, such as employment income, dividend income, etc. Depending on the type of income, a specific deduction is allowed to arrive at a taxable amount called “Shotoku.” For employment income, the employment income deduction is allowed to arrive at employment “Shotoku” amount.
[②] Year-end adjustment refers to a payroll process whereby an employer computes annual income tax based on annual employment income paid to its employees and settles the difference between final income tax amount and income tax withheld in the last payroll for that tax year.