A Guide to Expat Tax & Social Security in Japan 2014
If you just want to know how much of your salary will be left after paying for tax and social security, then head to the Japan budget. It’ll calculate it all for you automatically.
However if you’ve got questions about how Japan's tax and social security works, whether or not you need it, what you have to pay and so forth, then read on.
If you’re unfamiliar with how tax generally works as an expat, then quickly go read this expat tax primer then come back.
And on with the show.
Do you have to pay tax in Japan
Japan is no exception to the rule, “You nearly always have to pay tax in the country you earn money in”. You’ll have to pay tax in Japan.
The amount of tax you have to pay in Japan depends on whether or not you’re a resident. For 99% of teachers you’ll be a resident.
It’s only if your contract is explicitly less than one year, that you’ll probably end up being a non-resident. You’ll instead have a 20.5% income tax for non-residents and you’re unlikely to be able to use Japan’s double tax treaties.
Being a resident means you have to pay taxes like the rest of Japan and that's what we'll be focusing on. Whether or not you have to pay tax in your home country, on your income here, is covered in the tax primer.
If you are unfortunate enough to be double taxed there’s a full list here of all the countries Japan has tax treaties with.
What are the main taxes in Japan?
There are two main taxes in Japan:
- Income Tax: Tax paid to the national government
- Local Inhabitant Tax: Tax paid to your local government. (This is sometimes called resident's tax and it's the same thing as metropolitan tax and ward tax together, in case you hear those mentioned.)
How does Japan's social security work for expats?
If you’re staying in Japan for more than a year then you’re required to have health insurance and a pension. There are two different ways you can go about getting them:
- The National Health Insurance (kokumin kenko hoken) scheme and the National Pension scheme (kokumin nenkin)
- The Social Insurance scheme (shakai hoken)
The Social Insurance scheme provides both health insurance AND a pension.
So how do you choose between the two? The answer is you don't, your employer does.
Employers in Japan are legally required to sign up their full time employees to the Social Insurance scheme. If you're not signed up then you'll have to sign up to the National Health Insurance and the National Pension.
Because employers have to pay half of the Social Insurance scheme, companies will often try to avoid hiring people as employees, instead treating them as contractors or part-time workers.
29.5 Hours per week
29.5 hours a week is the magical number which divides part time employees from full time employees.
Full time employees under Japanese law have to be enrolled into Japan's Social Insurance scheme (shakai hoken). The cost of this is split half and half between the employer and employee as we mentioned above.
This means some companies will offer 29.5 hour contracts to avoid paying the Social Insurance cost.
Are you better off with or without shakai hoken?
In your first year, it's cheaper without it because of the low cost of national health insurance in the first year. After that, having it is a better deal.
If you're unsure of how long you're going to be in Japan, we'd recommend always trying to get it. This is because at the end of your time in Japan (assuming you've been paying into it for 6 months), you can withdraw your pension as a lump sum when you leave (i.e. they'll just give you the money).
The lump sums works differently depending on whether you have a shakai hoken pension, or a National Pension, but the short answer is that the shakai hoken pension lump sum payment is far more generous than the National Pension lump sum payment. (Remember your employer has been doubling your payments into shakai hoken. There's a 20% tax on it, but you can get most of that refunded.)
We also need to briefly mention pension dodging because there's a good chance you'll come across it and it effects what we've just said above.
Japan has historically had problems with people paying into its National Pension (i.e. the one you get if your contract is 29.5 hours or less) and it still struggles to get everyone to pay it.
This article in the Japan Times from back in March 14, sums up the pension service's most recent attempt to gather more of the missing pension payments.
Although having a National Pension is mandatory if you're not in shakai hoken, there's a good chance you'll come across expats who aren't paying into it. It might be because they don't know about it or just they don't want to spend the money, because even with the rebate, you'll only get roughly half of it back.
If you skip out on the pension payments it makes not having shakai hoken far more appealing, because you'll get an extra 15,000 yen a month. The problem comes if your circumstances change, perhaps you change companies or marry a Japanese national etc. If one way or another you end up getting enrolled into a pension scheme, Japan's National Pension Service will come asking for all the payments you didn't make.
This changes our calculation for the second year and makes it slightly more beneficial to not have shakai hoken (the cost of the pension outweighs the increase in health insurance), but again this is assuming the Pension Service doesn't come calling, at which point it swings wildly back in favour of shakai hoken, so we'd still recommend it.
How is tax and social security paid in Japan?
Tax in Japan is mostly paid on a withholding system. This means your employer calculates it and takes it out of your earnings before you ever see it.
This is good news because you don’t need to do anything.
Your employer will definitely take out your income tax on a month by month basis. They’ll also probably take out your local inhabitants tax month by month, although it could also be quarterly. If you’re really unlucky they may just give you the money and you'll have to pay it.
At the end of the year your employer will make sure you've paid the correct amount of tax and if you’ve over or underpaid they’ll make up the difference in your last pay check. (Unless you’re getting a salary from abroad, or income from two or more sources. Then you've got to do this part. This is beyond the scope of this article, head to here (page 12 of the pdf) for more information.)
Social security payments happen in different ways depending on which scheme you're on.
If you're signed up to the Social Security scheme then the cost will be taken out of your salary each month like income tax.
If you've had to sign yourself up to National Health Insurance then the government will calculate the amount and bill you for it, which you’ll then need to then pay. It can be paid at various institutions and shops or debited straight from your account. (See the final section of this article for a list.)
The sum of all this: you probably won’t need to know how your tax and social security is calculated. If you just want to plan your spending and work out how much you can save, the budget will give you a rough calculation of both tax and social security costs.
But if you want to make sure you’re being taxed correctly, or are trying to navigate the ins and outs of the tax system then the following calculations and explanations should be useful.
How do you calculate tax and social security?
For this example where numbers vary slightly (things like inhabitant tax may vary a small amount across Japan.), I've used numbers from Tokyo's Bureau of Taxation.
Onto the explanation. Hopefully this is as free from tax jargon as possible, but unfortunately a couple of words have still had to have been used.
Gross Salary/Income: This is referring to your income before any money is taken out of it like taxes or social security payments etc.
Calender Year - Jan to Dec
Fiscal Year - Jan to Dec
We need to calculate three things:
- Income tax
- Inhabitant tax
- National Health Insurance or the Social Insurance scheme
When we've calculated them, we take them off our income to get the number that ends up in our bank account. Let’s get started:
National Health Insurance:
Take whichever of the following is greater:
[Your previous fiscal years income – 330,000)] OR 0
Then take that number multiply it by 0.047 and add 24,400, to get the total yearly cost of health insurance.
As you may have noticed, the first year you arrive this will be very small. If you arrive in September, you haven't been in Japan for the previous Jan - Dec, you certainly didn’t make any money, so it’s just 24,400.
It’s paid for with a number of payments made across the fiscal year (eight for Tokyo) usually at the end of a month.
Social Insurance Scheme:
Costs: 4.99% of gross salary (health insurance) + 8.56% of gross salary (pension) each month.
Along with health insurance, the social insurance scheme also pays for a pension. The actual cost is double this, but your employer has to pay half of it. (The main reason they try so hard to avoid giving you it.)
Take your annual gross salary. Take away your Employment Income Deduction. (To calculate it, use the table below.)
|Your Annual Salary||How to calculate your Employment Income Deduction|
|0 - 1,800,000||The greater of (Annual Salary x 40%) or 650,000|
|1,800,001 - 3,600,000||(Annual Salary x 30%) + 180,000|
|3,600,001 - 6,600,000||(Annual income x 20%) + 540,000|
|6,600,001 - 10,000,000||(Annual Salary x 10%) + 1,200,000|
|10,000,001 - 15,000,000||(Annual Salary x 5%) + 1,700,000|
Remove any deductions you can claim (usually just your health insurance/social security payments, see here (right hand side) for full list), along with your standard personal deduction (380,000 yen).
Then you need to calculate income tax on what's left. You do that by splitting your salary up into the brackets below and paying the correct tax rate for each part of your salary. For example your salary was 2,050,000, then you’d have to pay 5% on the first 1,950,000 and 10% on the last 100,000.
|Your Annual Salary||The percentage of tax you have to pay|
|0 - 1,950,000||5%|
|1,950,001 - 3,300,000||10%|
Finally multiply your total income tax amount by 2.1% to pay the extra earthquake recovery tax. That's your total income tax.
Take your annual net salary you earned last year (Jan – Dec). Take away your Employment Income Deduction. (Calculate it with the table in the income tax section.)
Remove any deductions you can claim (usually just your health insurance/social security payments see here (left hand side) for full list), along with your standard personal deduction (330,000 yen for inhabitant tax).
Take 10% of what’s left over and then add 4,000. (From 2014 onwards add an additional cost of 1000 because of the earthquake reconstruction tax).
That’s how much local inhabitant tax you should pay.
You only have to pay inhabitants tax (on the amount earned last year) if you were a resident of Japan on the first of January of that year.
Extra Notes on the Inhabitant Tax
For most teachers you won't have to pay inhabitant tax at all for the first part of your year and then you'll have to pay a reduced amount for what's left of the year (although this depends when you arrive). How?
If you arrive in September 2014, you’ll owe no tax for 2014 because you weren't a Japanese resident on Jan 1st 2014. You will be in Japan on Jan 1st 2015, which means you'll have to pay the next year's inhabitant tax, but because it's calculated on last years income, you'll only be paying it for September to Dec.
This does sometimes lead to people attempting to leave the country late December, revoking their resident status and thus avoid qualifying for inhabitant tax for a year.
A note about deductions: Also although you can deduct the same things, the amount you can deduct is less for inhabitant tax. For example your standard personnel deduction is 330,000 for calculating inhabitant tax, but 380,000 for calculating income tax. The table here we've been linking to, compares the two.
Still awake? Time for an example calculation.
Example Japanese Tax Calculation
We arrive in Japan in September, our salary is 250,000 yen a month. We'll leave next September, putting us in Japan for one year.
We’re not enrolled by our employer in the Social Insurance scheme so we take National Health Insurance. Let's calculate what our annual salary is after everything has been paid.
National Health Insurance:
We arrived in September, so our National Health Insurance will last from Sep to Sep.
Because we earned nothing in the fiscal year (Jan - Dec) before we arrived. (obviously...), we just have to pay the fixed part of the health insurance cost in 8 payments which is:
Our annual gross salary is:
Now we use the two tables above to calculate the income tax:
First we have to calculate our employment income deduction.
3,000,000 fits into the third bracket of the table (see previous section) so our employment income deduction is:
Which we then take off our income:
We then need to take off our personal deduction which is always 380,000 for income tax and our health insurance payments.
We then split that up into the brackets of our final table to calculate the tax we’ll have to pay:
1,515,600 fits in the first bracket, so our income tax is 5% of it.
Our final income tax is 1,515,600 multiplied by 2.1% for the earthquake reconstruction tax:
Remember you only have to pay inhabitant tax if you were a Japanese resident on the first of January for the year.
We arrived in September so we only have to pay inhabitant tax in the next tax year (because then we'll have been in Japan on the 1st January).
We then calculate our employment income deduction here and take it off our salary.
Then we remove the basic deduction of 330,000 (it’s less for inhabitant’s tax) along with the social security we paid LAST year (Jan - Dec). Remember we’re paying very little for our social security up until March, so it’s just 3050*4 =12200.
Then we take 10% of that number and add (4000+1000) to get our final inhabitant tax.
Now we can put all those together and see our income:
Annual Salary - income tax - inhabitant tax - health insurance = Net salary
Of course depending on where you have to pay the health insurance and the inhabitant tax, your pay slip probably won't look exactly like that, but that’s what it’ll work out to month by month at the end.
How to get your Japanese pension paid out as lump sum
The process is relatively simple, you'll need to gather a couple things before you leave Japan and then post them over once you've left.
You'll need to pick up a form called “Application for the Lump-sum Withdrawal Payments” from your local social insurance office or you can print it out from here (page 11).
You need to fill in some basic information and you'll need to get your bank to stamp it.
You'll then need to choose a tax representative (normally one of your employers). This means you'll need to get another form: "Declaration Naming a Person to Administer Taxpayer’s Tax Affairs" which you can either get from your local tax office or print out here. Get them to fill it in (the form is in Japanese), and then hand it back to your local tax office.
This will let you get the tax refund when you finally get the lump sum payment.
Once you've left Japan you'll then need to post your “Application for the Lump-sum Withdrawal Payments” back along with the supporting documents, which are your pension book and a photocopy of your passport showing the date when you left Japan and who you are.
You can find the label for postage on page 13 of the lump sum guide we mentioned above.
Several months later you'll get the payment and a receipt in the post. You then need to send the receipt back to your tax representative who can file it on your behalf and get you the final part of the money.
Here's a really standard tax disclaimer: We're not tax lawyers, this isn't official tax advice. You're responsible for what you do, if you're unsure of anything you'll need to talk to a proper tax lawyer and all that good stuff. I'm sure you knew all this anyway.