Nenmatsu chosei: Japan's Year-End Tax Adjustment

Japanese payroll withholds income tax monthly on an estimated basis, using a table that assumes a steady salary and a standard set of circumstances. Almost nobody's circumstances are standard, so the estimate is almost always wrong.

Nenmatsu chosei, the year-end adjustment, is the correction. The employer recalculates the year's actual liability in November or December, sets it against what was withheld, and settles the difference through the December or January payslip. For the majority of employees this replaces filing a tax return entirely.

What the payslip looks like before adjustment

Single employee, 2026 rates, as calculated by the Japan Salary calculator. Inhabitant tax is assessed on the previous year's income and collected the following June to May.

Social insurance is the largest deduction at every level, running around 15% of gross for health, pension and employment insurance combined. It is fully deductible against income tax, which is one of the reasons the Japanese effective rate stays moderate at salaries where European rates have climbed sharply.

The deductions that only apply if you claim them

The year-end adjustment applies the basic deduction and the employment income deduction automatically. Everything else requires a form, submitted with evidence, usually in early or mid November.

• Life insurance and earthquake insurance premiums. Deductible up to defined caps. The insurer posts a certificate each October specifically for this purpose, and it is the document most commonly left in a drawer.
• Dependants. Spouse, children and dependent parents each reduce taxable income, with amounts varying by age and by the dependant's own income.
• Social insurance paid personally. National pension contributions made on behalf of a student child, for example, are deductible by whoever paid them.
• iDeCo contributions. The individual defined contribution pension is fully deductible from taxable income, making it the closest Japanese equivalent to a European pension contribution.
• Housing loan credit. A credit rather than a deduction, worth a percentage of the outstanding mortgage balance for a period of years. The first year requires filing a return; subsequent years can go through the year-end adjustment.

None of these is applied without the form. There is no automatic detection and no reminder beyond the employer's internal deadline, which is typically two to three weeks before the payroll cut-off.

When you still have to file a return

Kakutei shinkoku, the tax return proper, is required rather than optional in several situations:

1. Total employment income above ¥20 million, where the year-end adjustment is not available at all.
2. Income from a second employer, or side income above ¥200,000.
3. Medical expenses above the threshold, which cannot be claimed through the year-end adjustment.
4. Donations, including furusato nozei made through more than five municipalities.
5. The first year of the housing loan credit.
6. Leaving Japan mid-year, or starting employment part way through the year without a previous employer's withholding certificate.

Furusato nozei, which is not really a tax

The hometown tax scheme allows residents to donate to any municipality in Japan and deduct almost the whole amount from their income and inhabitant tax, retaining only a ¥2,000 out-of-pocket cost. Municipalities compete for the donations by sending back local produce: rice, beef, seafood, sake, fruit.

The practical effect is that a taxpayer redirects part of a bill they would have paid anyway and receives goods worth up to 30% of the donation. On a ¥8,000,000 salary the annual limit runs to well over ¥100,000, making it one of the most straightforwardly advantageous schemes available to any salaried employee anywhere.

Donating through five municipalities or fewer allows the one-stop exception, which handles the paperwork without a tax return. Beyond five, a return is required.

The inhabitant tax lag

Local inhabitant tax is assessed on the previous calendar year's income and collected from June to May of the following year. Two consequences follow, and both catch people out.

Someone whose income rises sharply pays inhabitant tax on the old income for a while, then faces a larger bill a year later. Someone who leaves employment, or leaves Japan, still owes inhabitant tax on the previous year's income, payable regardless of current circumstances. Departing employees frequently receive a bill after arriving in another country.

The lag is also why Japanese take-home pay in the first year of employment looks unusually good: no inhabitant tax is assessed on income that did not exist the year before. The full picture of Japanese pay, including what the currency has done to its international standing, is in strong in yen, weak in euros.