Japan's Defense Tax: Will Take-Home Pay Fall From 2027?

Employees / sole proprietors / company owners

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. How to calculate the income tax increase from your withholding tax statement, the misconceptions that spread in October 2026, and the year-end funding debate are covered in Special Defense Income Tax: How Much More Will You Pay?

Estimate the impact on your take-home pay: work out a rough take-home figure from your annual income and get a sense of how the tax increase affects it.Calculate take-home pay →

"The total tax rate does not change" is only half true

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, and the special defense income tax has no defined end date, 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.
From 2038 (when the reconstruction tax would originally have ended) Before the reform, the special reconstruction income tax was to end at the close of 2037, bringing the surtax to zero. With the extension, defense 1% + reconstruction 1.1% = 2.1% continues through 2047.
From 2048 The special reconstruction income tax ends at the close of 2047. The special defense income tax (1%) has no defined end date ("for the time being from 2027 onward") and continues after that.

Breakdown of the funding sources (three pillars)

The funding for the increase in defense spending (a target of 2% of GDP) combines spending reform, fiscal surpluses, non-tax revenue, and tax measures. The tax measures are planned to secure a little over ¥1 trillion in FY2027[Ministry of Finance (in Japanese)] and rest on 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.

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 the surtax burden between 2027 and 2037.

Current (through December 2026)

Income tax amount × 2.1%

Special reconstruction income tax: 2.1%
Special defense income tax: none

Taxation period through 2037

From January 2027 onward

Income tax amount × 2.1%

Special reconstruction income tax: 1.1%
Special defense income tax: 1.0%
The total is the same 2.1%

Taxation period through 2047 (10-year extension)

Calculation example: an employee earning ¥5 million a year (income tax amount of about ¥140,000)

Current: ¥140,000 × 2.1% = ¥2,940 (annual surtax amount)

2027–2037: ¥140,000 × 2.1% = ¥2,940 (no change)

2038–2047 (zero without the reform): ¥140,000 × 2.1% = ¥2,940/year added burden

2048 onward: ¥140,000 × 1% = ¥1,400/year, with no end date

Cumulative added burden over the 10 years from 2038 to 2047: about ¥29,400 (for an annual income of ¥5 million)

If withholding changes in January 2027, the special defense income tax is not the reason

The special defense income tax does not change how withholding is calculated. From January 2027, however, withholding switches to the "Withholding Tax Tables for 2027," which reflect the higher basic deduction, and many people will see less tax withheld[National Tax Agency (in Japanese)]. Amounts by income level are in Japan's 1.04 Million Yen Basic Deduction Ends After 2027.

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.

Calculation formula for the special defense corporate tax

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 ¥1.66 million	Zero or less	¥0
¥20 million	About ¥3.98 million	Zero or less	¥0
¥30 million	About ¥6.30 million	About ¥1.30 million	About ¥52,000
¥50 million	About ¥10.94 million	About ¥5.94 million	About ¥238,000
¥100 million	About ¥22.54 million	About ¥17.54 million	About ¥702,000

Corporations with taxable income of about ¥24.4 million or less owe zero

Assuming the reduced corporate tax rate (15% on the portion up to ¥8 million, 23.2% on the excess), for corporations with taxable income of about ¥24.4 million or less 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.

A return is required even when the tax is zero (from the fiscal period ending March 2027 onward)

For fiscal years beginning on or after April 1, 2026, corporations subject to corporate tax file a special defense corporate tax return. The National Tax Agency states that a return is required even when the special defense corporate tax amount is zero. The return is part of the same form as the corporate tax return, but its entry fields are on a separate sheet, so take care not to leave it out[National Tax Agency (in Japanese)].

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

Income tax: 15.000%
Special reconstruction income tax: 0.315%
Residence tax: 5.000%
Total: 20.315%

Breakdown from 2027 onward

Income tax: 15.000%
Special reconstruction income tax: 0.165%
Special defense income tax: 0.150%
Residence tax: 5.000%
Total: 20.315% (unchanged)

Impact on NISA

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 reaches investors too. Without the reform, the rate would have fallen to 20% from 2038; instead, defense 0.15% + reconstruction 0.165% = 0.315% is added from 2038 to 2047, and defense 0.15% continues to be added from 2048 onward.

Summary

Income tax (from 2027)The surtax does not change from 2027 to 2037. However, taxation continues from 2038 onward

Corporate tax (from 2026)Corporations with taxable income of about ¥24.4 million or less owe zero (a return is still required). Large companies and highly profitable corporations feel the effect of the 4% add-on

Stocks / dividends (from 2027)The 20.315% on specified accounts does not change through 2047. NISA is unaffected. From 2048 it is 20.15%

The true nature of the real tax increaseFrom 2038 to 2047, when the surtax would otherwise have been zero, 2.1% of the income tax amount is added, and from 2048 1% continues with no end date

What to do nowCorporations should file the special defense corporate tax return even when the tax is zero. Individuals should draw up a long-term asset plan that takes the continued taxation from 2038 onward into account

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.

* 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.