Will Japan raise taxes on retirement allowances? Where the "20-year cliff" debate stands
Japan's lump-sum retirement allowance — a pillar of retirement savings — enjoys a powerful tax shelter called the retirement income deduction, which grows more generous the longer you stay at one employer. A review of this system, often reported as a "retirement allowance tax hike", was written into the government's 2023 policy blueprint, retreated after a public backlash dubbed the "salaryman tax increase", and still remains on the reform agenda. The core review has been shelved three years in a row, but changes around its edges have already begun. The next milestone is the fiscal 2027 tax reform outline due in mid-December 2026. This article separates what is decided from what is not, and estimates how much more tax you would pay if the deduction were flattened.
・Cutting the retirement income deduction itself is not decided (postponed in the fiscal 2024–2026 reforms).
・But peripheral tightening is under way — the "10-year rule" coordinating iDeCo lump sums with retirement allowances took effect in January 2026.
・If the "20-plus-years premium" were flattened, a worker with 30 years of service and a ¥15 million allowance would pay roughly ¥230,000 more (estimates below).
・This is not a reason to rush your resignation — the right preparation is knowing your deduction and designing how you receive the money.
The current system — why retirement allowances are taxed lightly
Retirement allowances are taxed separately from salary, with a two-layer cushion[NTA No.1420].
| Years of service | Retirement income deduction |
|---|---|
| 20 years or less | ¥400,000 × years (minimum ¥800,000) |
| Over 20 years | ¥8 million + ¥700,000 × (years − 20) |
With 38 years of service the deduction is ¥20.6 million. Since the average retirement benefit for university graduates retiring at mandatory age is about ¥19 million according to the Ministry of Health, Labour and Welfare's survey[MHLW survey], the average career employee pays almost no tax on a mandatory-retirement allowance today. See our guides to how retirement allowances are taxed and the take-home quick reference.
What is the problem? The slope changes at 20 years
The single point of contention: the deduction accrues at ¥400,000 per year, jumping to ¥700,000 per year after 20 years at the same employer. A person entering year 21 at one company adds ¥700,000 of tax-free room; someone who changed jobs and reset the counter adds only ¥400,000.
In its June 2023 medium-term report, the government Tax Commission noted that this gap may distort job changes and career choices, listing a review "reflecting changes in payment styles and the labor market" as an issue[Tax Commission]. There is a real point here: a tax design premised on lifetime employment fits poorly with an era of routine job changes.
From a worker's perspective, however, this is inseparable from heavier taxation of retirement living funds. With Japan's national burden ratio (taxes plus social insurance) already in the high 40s percent (see our international comparison), trimming only the deduction in the name of "fairness" would shrink the final payout of people who already carried a heavy burden through their working years. Whether any review comes with transition relief and offsetting cuts is the point to watch.
How the debate unfolded — declaration, backlash, three straight postponements
- June 2023The Tax Commission's medium-term report flags the issue; days later the Cabinet's Basic Policy 2023 ("honebuto") states the government "will review the taxation of retirement income"[Basic Policy 2023].
- Summer 2023Criticism explodes online as a "salaryman tax increase"; the government tones the plan down.
- Dec 2023–Dec 2025The core review is postponed three years running in the fiscal 2024, 2025 and 2026 tax reform outlines, reportedly to avoid a debate over higher burdens[Nikkei].
- Jan 2026A peripheral change takes effect — the coordination window between iDeCo lump sums and retirement allowances stretches from the "5-year rule" to the "10-year rule" (see our guide to the order of receipt).
- Mid-Dec 2026The fiscal 2027 tax reform outline — the next decision point for the review left over from labor-market reform.
Directors with five or fewer years of service lost the 1/2 taxation; short-service employees (five years or less) lost it for the portion above ¥3 million after the deduction; and from 2026 the 10-year rule narrows the "double use" of deductions between iDeCo and company allowances. Only the core deduction remains untouched — the direction of pressure is clearly toward tightening.
If the deduction were flattened, how much more tax? (estimates)
No concrete proposal exists yet, so we assume the flattening to a uniform ¥400,000 per year often cited in the debate (no other income, the 1/2 rule kept, national income tax + reconstruction surtax + 10% resident tax).
| Case | Tax now | If flat ¥400,000 | Increase |
|---|---|---|---|
| 25 years, ¥12 million | ≈¥38,000 | ≈¥151,000 | +≈¥110,000 |
| 30 years, ¥15 million | ¥0 | ≈¥227,000 | +≈¥230,000 |
| 38 years, ¥20 million | ¥0 | ≈¥385,000 | +≈¥390,000 |
| 38 years, ¥25 million | ≈¥345,000 | ≈¥1,054,000 | +≈¥710,000 |
*Estimates under an illustrative assumption. The actual level and transition rules are undecided, and under this assumption nothing changes for those with 20 years of service or less. Check your tax under current law with the take-home quick reference.
Flattening also has a tax-cut side: it stops penalizing job changers. Someone with 12 years of service and two job changes accrues only ¥400,000 per year today; if the uniform rate were set higher (say ¥500,000), the design could even work in their favor. What to read in the December outline: the per-year amount, and who it applies to from when.
What you can do now — do not panic, know your design
Bottom line: moving up your resignation because of reform speculation puts the cart before the horse. There is not even a draft yet, and any change would normally apply to allowances paid on or after the effective date. Three things reliably help now.
- Know your deduction — compute it from your years of service (fractions round up) and compare it with your expected allowance to see where tax would start.
- Design the order with iDeCo — the 10-year rule effective 2026 makes the interval between an iDeCo lump sum and a company allowance matter more. See the order-of-receipt guide; iDeCo contribution limits also change in December (iDeCo 2026 reform).
- Watch the December outline — how Japan's tax reform season works is explained in our guide to the fiscal 2027 reform requests. Whether retirement allowances appear at all is the first fork.
Frequently asked questions
Has a retirement allowance tax hike been decided?
No. The core review of the retirement income deduction was postponed in the fiscal 2024–2026 tax reforms. Peripheral changes such as the 10-year rule for iDeCo lump sums did take effect in January 2026, and the next milestone is the fiscal 2027 tax reform outline due in mid-December 2026.
Who would pay more if the deduction were flattened?
Under the illustrative uniform ¥400,000-per-year assumption, those affected have more than 20 years of service and an allowance near or above the deduction. Estimates: about ¥230,000 more at 30 years of service with ¥15 million, and about ¥710,000 more at 38 years with ¥25 million. Nothing changes for 20 years or less under this assumption.
Should I retire before any change takes effect?
We do not recommend it. No draft exists, and changes would normally apply to allowances paid on or after the effective date. Knowing your deduction amount and designing the order of receipt with iDeCo is far more useful than moving your retirement date.
Sources
Based on the following primary sources and press reports. The content and timing of any review are undecided and may change with future outlines and bills.
- National Tax Agency No.1420: When you receive a retirement allowance
- Cabinet Office: Basic Policy on Economic and Fiscal Management 2023
- Cabinet Office: Tax Commission
- Ministry of Finance: Tax reform outlines by year
- MHLW: General Survey on Working Conditions (retirement benefits)
- Nikkei: Retirement allowance tax reform postponed for the third straight year (November 2025)
*This article is general information, not tax advice. Retirement allowance tax depends on how you receive it, other income and your municipality. Consult the tax office or a licensed tax accountant for specific decisions.
