Taxes on retirement allowances: how to calculate the retirement income deduction and maximize your take-home amount
A retirement allowance is a special kind of income that is taxed separately ("separate taxation"), apart from your other income. As a reward for many years of work, its tax treatment is heavily favorable, and the tax burden is far lighter than when the same amount is received as salary. Be sure to understand the points you can lose money on if you don't know them, such as the rule for combining it with iDeCo.
The formula for retirement income
The "× 1/2" break is a major feature of retirement allowances — a discount that salary income does not have[NTA No.1420].
The retirement income deduction (by years of service)
20 years or less: ¥400,000 × years of service (minimum ¥800,000)
Over 20 years: ¥8,000,000 + ¥700,000 × (years of service − 20 years)
| Years of service | Retirement income deduction |
|---|---|
| 5 years | ¥2,000,000 |
| 10 years | ¥4,000,000 |
| 20 years | ¥8,000,000 |
| 25 years | ¥11,500,000 |
| 30 years | ¥15,000,000 |
| 40 years | ¥22,000,000 |
5 years and 1 month of service is counted as "6 years." The timing of your retirement date affects the deduction amount.
Simulation: 30 years of service, retirement allowance ¥20,000,000
① Retirement income deduction: ¥8,000,000 + ¥700,000 × 10 years = ¥15,000,000
② Taxable retirement income: (¥20,000,000 − ¥15,000,000) × 1/2 = ¥2,500,000
③ Income tax (separate taxation): ¥2,500,000 × 10% − ¥97,500 = about ¥153,000
④ Residence tax: ¥2,500,000 × 10% = ¥250,000
Total tax burden: about ¥400,000 (a tax burden rate of just 2%)
The problem of combining iDeCo with a retirement allowance
If you receive an iDeCo (defined contribution pension) lump sum and your company retirement allowance close together in time, the retirement income deduction is aggregated, and the mechanism is such that you cannot use it twice. The order and the interval in which you receive them are the key.
If you receive your company retirement allowance first, and there was an iDeCo or similar lump sum within 19 years before it (i.e., in the prior years), the deduction is adjusted (in effect, an interval of roughly 20 years is needed). Conversely, if you receive iDeCo first and the retirement allowance later, the old rule was "a separate allowance if you leave 5 years' gap" (the 5-year rule), but the FY2025 (Reiwa 7) reform extended this to the "10-year rule" for iDeCo and similar lump sums received on or after January 1, 2026. Designing the order and timing of receipt is now even more important (check the latest application rules with the NTA and your operational management institution).
How to receive a retirement allowance: lump sum vs. pension
Lump-sum (one-time) receipt
Treated as retirement income, so you get the benefit of the retirement income deduction plus half-taxation. If it falls within the deduction amount, the tax burden becomes extremely small.
Receiving it as a pension
Treated as miscellaneous income (public pensions, etc.), and the portion within the "public pension deduction" is tax-free each year. The longer you live, the larger the total received; but when aggregated with your pension, the tax rate may rise[NTA No.1600].
Because the retirement income deduction is large and there is also the half-taxation break, in many cases receiving a lump sum saves more tax.
Procedures
Submit the "Declaration for Receipt of Retirement Income" to your company
If you submit the declaration to your company at retirement (the company usually prepares the paperwork), the company withholds tax correctly, so in principle no tax return is needed.
A flat 20.42% (income tax and special reconstruction income tax) is withheld from the retirement allowance. You then need to settle it (obtain a refund) by filing a tax return.
Short-term retirement allowances (non-officers with 5 years or less of service): of the amount remaining after subtracting the retirement income deduction, the portion exceeding ¥3,000,000 cannot use "half-taxation" (the portion of ¥3,000,000 or less is still halved as before)[NTA No.2740].
Specified-officer retirement allowances (officers with 5 years or less of service): the entire amount after subtracting the retirement income deduction is taxable, and half-taxation does not apply at all[NTA No.2737]. Special care is needed for officer retirement allowances over a short period.
Summary
FAQ
Do I need to file a tax return for a retirement allowance?
If you have submitted the "Declaration for Receipt of Retirement Income" to your employer, the company withholds tax correctly, so in principle it is not needed. If you do not submit it, a flat 20.42% is withheld, and you need to settle it by filing a tax return (often a refund).
What if there is a fractional part in the years of service?
A fraction of less than one year is rounded up to one year for the calculation. For example, 30 years and 1 month of service is calculated as 31 years for the retirement income deduction.
How should I receive iDeCo and a retirement allowance to be better off?
Because the retirement income deduction is aggregated, the order and interval of receipt matter. If you receive iDeCo first, from January 2026 onward you can use a separate deduction allowance by leaving a 10-year gap (the 10-year rule). If you receive the retirement allowance first, an iDeCo within 19 years before it is subject to adjustment.
Am I at a disadvantage with 5 years or less of service?
Non-officers cannot use half-taxation on the portion over ¥3,000,000 after the retirement income deduction, and officers (specified officers) cannot use half-taxation at all. A retirement allowance over a short period may carry a heavier tax burden.
Reference links (sources)
This article is based on the following materials published by the National Tax Agency (neutral, primary sources). Deductions and special provisions are subject to reform, so please check the latest content before receiving your allowance.
- NTA No.1420 When you receive a retirement allowance (retirement income) (in Japanese)
- NTA No.2740 Retirement allowances for those with 5 years or less of service (short-term retirement allowances) (in Japanese)
- NTA No.2737 Specified-officer retirement allowances (officers with 5 years or less of service) (in Japanese)
- NTA No.1600 Taxation of public pensions, etc. (in Japanese)
* This article is general information, not tax advice. For decisions on how and when to receive your allowance, please confirm with a tax office, a tax accountant, or your operational management institution.