Have you ever noticed that the amount deposited into your bank account is less than what you expected? A quick look at your pay slip reveals a series of deductions, leaving you with only about 80% of your gross salary. In this article, we’ll break down these mandatory and additional deductions and explain what they mean for you.
Mandatory Deductions
No matter where you work in Japan, there are five essential deductions you will encounter as an employee. These include mandatory contributions for income tax, resident tax, health insurance, welfare pension insurance, and employment insurance. Additionally, if you are 40 or older, you will also contribute to long-term care insurance.
1. Income Tax (所得税 - Shotokuzei)
Income tax is a progressive tax deducted from an employee's salary based on their annual earnings. The more you earn, the higher the tax rate. The tax rates for individuals as of 2024 are:
5% tax on income up to ¥1,950,000.
10% tax on income between ¥1,950,001 and ¥3,300,000.
20% tax on income between ¥3,300,001 and ¥6,950,000.
23% tax on income between ¥6,950,001 and ¥9,000,000.
33% tax on income between ¥9,000,001 and ¥18,000,000.
40% tax on income between ¥18,000,001 and ¥40,000,000.
45% tax on income over ¥40,000,000.
Employers withhold income tax from employees' salaries each month, based on an estimate of their annual income. However, the actual tax owed may vary due to changes in income, life events, or eligible deductions over the year. To address these differences, a year-end tax adjustment (年末調整 - Nenmatsu Chosei) is conducted. This process ensures that employees have paid the correct amount of tax. If too much tax was withheld, the extra amount is returned to the employee in December. If too little tax was withheld, the unpaid amount will be deducted from the December paycheck.
2. Resident Tax (住民税 - Juminzei)
Resident tax is a local tax in Japan that residents pay to their local government, typically the city or town where they live. This tax funds local public services, such as infrastructure, education, and social welfare programs. The resident tax is calculated at around 10% of the previous year's income. Employers start deducting it from June of the following year, spreading the payments over 12 months. However, if it’s your first year in Japan, you won’t have to pay resident tax, as it’s based on the income earned in the prior year.
Resident tax for public infrastructure
3. Health Insurance Premium (健康保険料 - Kenko Hokenryo)
In Japan, health insurance is mandatory for all residents, ensuring access to affordable healthcare. It contributes to the cost of medical care, including doctor visits, hospital stays, and prescription medications.
For employees, health insurance premiums are usually shared between the employer and the employee. The employer deducts the employee’s portion directly from their monthly salary and also contributes a portion on their behalf. The exact amount of the premium depends on the employee’s income, with higher earners paying more. This system is designed to be fair and proportional to one’s ability to pay, ensuring that everyone contributes according to their means.
Additionally, the premium rate can vary based on the region where you live. Each prefecture has its own health insurance association that sets the rates, reflecting local factors like the cost of healthcare services and the demographic makeup of the area. Although it varies, the premium is generally around 5% of the employee's gross salary.
4. Welfare Pension Insurance (厚生年金保険料 - Kosei Nenkin Hokenryo)
Welfare Pension Insurance is a public pension system in Japan that provides financial support to employees during retirement, as well as in cases of disability or death. This insurance is mandatory for all employees working in private companies and is administered by the Japan Pension Service. The contribution rate is approximately 18.3% of the employee’s gross salary, split equally between the employer and employee.
The benefits of Welfare Pension Insurance include a monthly pension paid upon reaching the age of 65, disability benefits for those unable to work due to illness or injury, and survivor benefits for the families of deceased employees. The amount of pension received is based on the length of contribution and the total premiums paid over the employee's working life.
For foreign employees working in Japan who plan to leave the country eventually, there’s no need to worry about waiting until age 65 to access your pension. If you contribute to the Japanese pension system and then leave Japan, you may be eligible for a partial refund of your contributions through the Lump-Sum Withdrawal Payment system. The eligibility for this refund depends on factors such as the duration of your stay and the amount of contributions made. It’s important to understand these conditions and plan accordingly to ensure you can take full advantage of the benefits you’ve earned.
5. Employment Insurance (雇用保険料 - Koyo Hokenryo)
Employment Insurance is a public insurance program in Japan designed to assist employees who face job loss or employees who need to take time off due to illness, injury, or maternity leave. It provides financial support to help cover living expenses while individuals seek new employment or undergo training. This insurance is mandatory for all employees in private companies, with contributions shared between the employer and employee. The premium is a small percentage of the employee's salary, typically around 0.3% to 0.4%.
Employment Insurance to protect employees
6. Long-term Care Insurance (介護保険料 - Kaigo Hokenryo)
Long-Term Care Insurance is a public program in Japan that provides financial support for individuals requiring long-term care due to aging, illness, or disability. It helps cover the costs of care services such as home care, nursing facilities, and other support services. Mandatory for all residents aged 40 and older, the insurance premiums are usually deducted from wages or paid through local taxes. The premium is approximately 1.8% of the employee’s gross salary, with the cost shared between the employer and employee.
Voluntary Deduction
In addition to mandatory deductions, you may also notice other deductions on your payslip. Unlike mandatory deductions, these are not required by law but are offered as options by the employer. It is important to note that employers must inform employees about these voluntary deductions in advance, allowing them to choose whether or not to participate. Here are some examples of voluntary deduction.
1. Union Fees (組合費 - Kumiai Hi)
Union fees are dues paid by employees who are members of a labor union in Japan. These fees support the union's activities, such as negotiating better working conditions, wages, and benefits on behalf of its members. The collective power of the union, funded by these fees, can lead to significant improvements in the workplace.
Typically, union fees are calculated as a small percentage of an employee's monthly salary. The exact percentage varies by union, but it's usually around 1%. Once an employee joins the union, the fee is automatically deducted from their salary each month, ensuring consistent support for the union’s operations.
By paying union fees, members gain representation in negotiations, access to legal support, and the benefits of being part of a larger community advocating for their rights. These contributions are crucial in helping the union protect and enhance the rights and well-being of its members.
2. Housing
Typical apartments in Japan
Some companies in Japan offer company housing or company-owned accommodation to their employees. These residences are usually available at significantly reduced rents, making them an appealing choice for those looking to lower their living expenses. If you choose to live in company-provided housing, the rent is typically deducted directly from your monthly salary, which simplifies the payment process.
Although it can be difficult to see how all those deductions add up on your paycheck, they are intended to benefit you in the long run. These contributions fund essential services such as healthcare, pensions, and other support programs that provide financial security and enhance your well-being.
However, it’s important to verify that all deductions are lawful and that your employer isn’t deducting more than necessary from your salary. Check out our company review website to see how other employees have experienced salary deductions at their workplaces. You can read genuine reviews and learn about various companies' practices. Visit Tokhimo Review now and sign up for free.
