How the defense tax increase works and its impact on take-home pay: a full explanation of the effects on income tax, corporate tax, and investments
From April 2026 for corporate tax and from January 2027 for income tax, a "special defense tax" will be added on top. Questions such as "Will my take-home pay fall?" and "How much will corporate tax rise?" are increasing, but the mechanism of the system is a little complex. We explain the structure of "no change in the short term but a real tax increase in the long term" from the standpoints of employees, sole proprietors, company owners, and investors.
From 2027 onward, the surtax rate on income tax (the reconstruction tax) will change internally from 2.1% to "defense tax 1.0% + reconstruction tax 1.1%." Because the numbers still add up to 2.1%, monthly take-home pay does not change. However, the taxation period of the special reconstruction income tax, which had been scheduled to end in 2037, will be extended by 10 years to 2047, so in the long term it amounts to a real tax increase[National Tax Agency (in Japanese)].
The overall picture of the defense tax increase
- From April 2026 (already in effect) The special defense corporate tax begins. It adds 4% on top of the amount remaining after deducting ¥5 million from the corporate tax amount. Most small and medium-sized enterprises are unaffected.
- From January 2027 The special defense income tax begins. It adds 1% on top of the income tax amount. At the same time, the special reconstruction income tax is lowered from 2.1% to 1.1%. The monthly amount withheld at source does not change.
- 2037 (the year the reconstruction tax was originally scheduled to end) Originally the special reconstruction income tax was supposed to end here, but the taxation period is extended to 2047. The 1.1% reconstruction tax continues even after 2037.
- 2047 Both the special defense income tax and the special reconstruction income tax end (scheduled).
The funding for the increase in defense spending (a target of 2% of GDP) is covered by three pillars: ① the special defense income tax, ② the special defense corporate tax, and ③ a tobacco tax hike. The tobacco tax is scheduled to be raised in stages from April 2027 onward[Ministry of Finance (in Japanese)].
Changes to income tax: employees, sole proprietors, and freelancers
From January 2027, the "special defense income tax" will be added to the calculation of income tax in withholding and in tax returns. However, because the special reconstruction income tax is lowered at the same time, there is no change in take-home pay between 2027 and 2036.
Current (through December 2026)
Special defense income tax: none
From January 2027 onward
Special defense income tax: 1.0%
The total is the same 2.1%
Current: ¥140,000 × 2.1% = ¥2,940 (annual surtax amount)
2027–2036: ¥140,000 × 2.1% = ¥2,940 (no change)
2037–2046 (the extended taxation period): ¥140,000 × 1.1% = ¥1,540/year (continues although it should originally have been zero)
Cumulative added burden over the extended 10 years: about ¥15,400 (for an annual income of ¥5 million)
The figures in the withholding tax table itself do not change between 2026 and 2027. Only the names of the internal components change. Payroll software will undergo system modifications, but employees hardly need to be aware of it.
Impact on tax returns
The calculation formula for the annual tax return that sole proprietors and freelancers file is the same. From the 2027 tax year (filed in March 2028), it becomes a two-part calculation of "income tax amount × 1.1% + income tax amount × 1.0%," but because the National Tax Agency's tax-return software (e-Tax) calculates it automatically, there is no increase in practical workload.
Changes to corporate tax: for company owners
For corporations, the "special defense corporate tax" applies from the business years that begin on or after April 1, 2026. Unlike individual income tax, this one has a basic deduction of ¥5 million, so most small and medium-sized enterprises are unaffected.
Special defense corporate tax = (base corporate tax amount − ¥5 million) × 4%
Base corporate tax amount of ¥5 million or less → the special defense corporate tax is zero
* Base corporate tax amount = the ordinary corporate tax amount (it does not include local corporate tax or residence tax)
The actual impact on small and medium-sized enterprises
| Taxable income | Corporate tax amount (reduced rate applied) | After the ¥5 million deduction | Special defense corporate tax |
|---|---|---|---|
| Up to ¥8 million | Up to ¥1.2 million (rate 15%) | Zero or less | ¥0 |
| ¥10 million | About ¥1.63 million | Zero or less | ¥0 |
| ¥20 million | About ¥3.63 million | Zero or less | ¥0 |
| ¥30 million | About ¥5.63 million | ¥630,000 | About ¥25,000 |
| ¥50 million | About ¥9.63 million | ¥4.63 million | About ¥185,000 |
| ¥100 million | About ¥19.63 million | ¥14.63 million | About ¥585,000 |
Assuming the reduced corporate tax rate (15% on the portion up to ¥8 million, 23.2% on the excess), for corporations with taxable income under about ¥25 million to ¥30 million the base corporate tax amount does not reach ¥5 million, so no special defense corporate tax applies. The vast majority of Japan's small and medium-sized enterprises fall within this range.
Corporations whose accounting period begins on or after April 2026 must attach a special defense corporate tax return as a supplementary schedule from their next tax return. Whether a filing is required even when the tax amount is zero is scheduled to be clarified in a future National Tax Agency directive. Check with your advising tax accountant.
Impact on investors: stocks, dividends, and NISA
Dividends and capital gains on listed stocks are currently subject to a 20.315% tax (income tax 15.315% + residence tax 5%). From 2027 onward, the internal breakdown of the 15.315% income tax changes, but the total tax rate of 20.315% does not change.
Current breakdown
Special reconstruction income tax: 0.315%
Residence tax: 5.000%
Total: 20.315%
Breakdown from 2027 onward
Special reconstruction income tax: 0.165%
Special defense income tax: 0.150%
Residence tax: 5.000%
Total: 20.315% (unchanged)
Gains and dividends within the new NISA (the growth investment quota and the tsumitate investment quota) remain tax-free. The defense tax increase affects only taxable accounts (specified accounts and general accounts) and has nothing to do with NISA.
However, the effect of the taxation period extension that continues after 2037 reaches investors too. Even after 2037, a 0.165% special reconstruction income tax will continue to be levied on dividend income and capital gains (normally the taxation would end in 2037).
Summary of the impact by category of person
Employees
Short term: no impact- Monthly take-home pay does not change in 2027
- The surtax continues for 10 years from 2037 onward
- Cumulative added burden of about ¥15,000 at an annual income of ¥5 million
- The figures on the payslip do not change
Sole proprietors / freelancers
Short term: no impact- Tax-return calculation is automated (e-Tax)
- The formula for the estimated tax prepayment changes slightly
- The continued taxation of 2037–2046 is a real tax increase
- The higher your income, the greater the effect of the taxation period extension
Company owners
Varies by size- Taxable income up to about ¥25 million: no impact
- Up to ¥50 million: a tax increase of about ¥200,000 a year
- Over ¥100 million: a tax increase of ¥600,000 or more a year
- Note the change to the tax return format
Investors (taxable accounts)
Short term: no impact- 2027–2036: the 20.315% tax rate does not change
- From 2037 onward: 0.165% continues due to the taxation period extension
- NISA accounts are not affected
- The tax-return calculation for dividend income does not change
Summary
FAQ
Will my take-home pay fall right away because of the defense tax increase?
From January 2027 onward, the surtax on income tax becomes "special defense income tax 1.0% + special reconstruction income tax 1.1%," and the total stays at the previous 2.1%. Monthly take-home pay does not change in 2027–2036. The real added burden is the portion where the reconstruction tax's taxation period is extended to 2047.
Do small and medium-sized enterprises also pay the special defense corporate tax?
4% is added on top of the amount remaining after deducting ¥5 million from the base corporate tax amount. Because of the deduction, most small and medium-sized enterprises with a corporate tax amount of ¥5 million or less (taxable income roughly up to the low ¥20 million range) bear zero.
When does it start?
The special defense corporate tax applies from business years beginning on or after April 1, 2026, and the special defense income tax starts from January 2027. The tobacco tax is also raised in stages.
Reference links (sources)
This article is based on the following materials from public bodies and news reports. For the details and latest information on the system, please check with the National Tax Agency and the Ministry of Finance.
- National Tax Agency — Overview of the special reconstruction income tax for individuals (in Japanese)
- Ministry of Finance — Tax measures for securing funds to strengthen defense capabilities (in Japanese)
- The Nikkei — Income tax increase to secure defense spending, starting January 2027 (in Japanese)
- Jiji Press — Defense tax increase from January 2027; added to income tax, offset by lowering the reconstruction tax (in Japanese)
- What is the special defense tax? 2026 finalized version: corporate tax in April, income tax finalized for 2027 (taxlabor.com) (in Japanese)
- The special defense corporate tax has begun — are SMEs facing a tax increase? (MONEYIZM) (in Japanese)
- freee — What is the special defense corporate tax? The new tax that applies from 2026 (in Japanese)
- National Tax Agency — Overview of the special reconstruction income tax for individuals (in Japanese)
* The content of this article is for informational purposes and is not tax advice. For the details and latest information on the system, please confirm with the National Tax Agency or your advising tax accountant.