Under the Pension System Reform Act, The “1.06- Million-Yen Annual Income ‘Barrier’ Has Been Abolished
Introduction
Similar to income tax, there are two types of barrier related to social insurance premiums: the “1.06-million-yen barrier/barrier” and the "1.3-million-yen barrier/barrier." Both indicate income levels at which social insurance premiums become payable. The "1.06-million-yen barrier" applies to the Employees' Pension Insurance and Employees’ Health Insurance systems*, while the “1.3-million-yen barrier" applies to the National Pension Insurance and National Health Insurance for dependent spouses. The so-called Pension System Reform Act has been enacted, revising the eligibility criteria for social insurance and other related provisions. As a result, the “1.06-million-yen barrier" among the income barrier has been abolished.
* https://www.nenkin.go.jp/service/pamphlet/kaigai/konen-kenpo.files/English.pdf
Revision of the "Annual Income Barrier" for Social Insurance
With the enactment of the Pension System Reform Act, the "1.06-million-yen barrier" related to the Employees' Pension Insurance and Employees’ Health Insurance systems will be revised within three years of the date of promulgation (June 20, 2025), on a date specified by Cabinet order. On the other hand, the "1.3-million-yen barrier" related to the National Pension and National Health Insurance was not directly revised under the Pension System Reform Act.
Content of, and Problems with, the “1.06-Million-Yen Barrier"
The “1.06-million-yen barrier/barrier” refers to the phenomenon where part-time workers or casual workers (short-term workers) who meet certain criteria, such as earning an annual income of 1.06 million yen or more, are required to enroll in the Employees' Pension Insurance and Employees' Health Insurance systems, and pay insurance premiums.
For example, if the wife (B) of a full-time employee (A) works part-time and earns less than 1.06 million yen annually, only husband A would be enrolled in the Employees' Pension Insurance and Employees’ Health Insurance programs, and pay premiums out of his own pocket. However, if wife B's part-time income exceeds 1.06 million yen and meets certain criteria, she would be required to pay premiums for the Employees' Pension Insurance and Employees’ Health Insurance out of her own pocket, resulting in a reduction in the household's overall take-home pay.
To prevent this reduction in net income, efforts to adjust part-time employment to keep the annual income of short-term workers below 1.06 million yen were seen as contributing to labor shortages.
The five criteria for part-time workers to enroll in the Employees' Pension Insurance and Employees’ Health Insurance systems, and pay premiums on their own (the current structure)
- Wage requirement: Regular monthly wages of 88,000 yen or more (annual income of 1.06 million yen or more)
- Company size requirement: Employed at a workplace with 51 or more employees (insured persons)
- Working hours requirement: Regular working hours of 20 hours or more per week
- Employment period requirement: Intention to work continuously for more than two months
- Non-student requirement: Not a student
Revision Details
The "1.06-million-yen barrier" will be completely abolished in the future. Under the Pension System Reform Act, the wage requirement for eligibility for the Employees' Pension Insurance and Employees' Health Insurance programs will be abolished by a date or dates? specified by Cabinet order. within three years from June 20, 2025. In other words, after the reform, the wage requirement will be abolished, and there will no longer be an income barrier for eligibility for the Employees' Pension Insurance and Employees' Health Insurance. As a result, short-term workers will be eligible for the Employees' Pension Insurance and Employees' Health Insurance programs regardless of their wages, provided they meet other eligibility criteria.
The Other Eligibility Criteria
The company size requirement will also be abolished. However, unlike the wage requirement, this will be abolished in stages. Specifically, the current company size requirement of "51 or more employees" will be revised as follows:
| October 1, 2027 | 36 or more employees |
|---|---|
| October 1, 2029 | 21 or more employees |
| October 1, 2032 | 11 or more employees |
| October 1, 2035 | Completely abolished |
As of October 1, 2035, the wage requirement and company size requirement will both be completely abolished, leaving only the working hours requirement, employment period requirement, and non-student requirement. An increase in social insurance contributions is anticipated, so companies must prepare accordingly.
Submission Scope of Both Tax Withholding Statements for Retirement Income and Special Withholding Statements Expanded
Introduction
Under the tax reform plans for the fiscal year 2025, the scope of submission for "tax withholding statements for retirement income, and special tax withholding statements" has been revised from only executives to all employees. Previously, only statements for executives were required, but under the tax reform for FY2025, submission is now required for all employees.
In Principle, Submission of Statements is Required upon Retirement
The "Tax Withholding Statement for Retirement Income and Special Tax Withholding Statement" must be issued by the payer to the recipient within one month of retirement, and one copy each must be submitted to the relevant tax office and the municipality (based on the recipient's address as of January 1 of the payment year).
Currently, as an exception, the "Tax Withholding Statement for Retirement Income" submitted to the competent tax office may be submitted in a consolidated manner for all recipients who retired during the year by January 31 of the following year. If this exception is applied, the payer is not required to submit the statement to the tax office each time an officer retires, but may submit a consolidated statement for the entire year.
This procedure will continue to apply even after the amendment. Therefore, the payer may submit all tax withholding statements for employees who retired during the year by January 31 of the following year. However, please note that for special tax withholding statements, submission within one month of the recipient’s retirement is generally required.
Be Aware that the Scope of Collection Differs Before and After the Reforms
The scope of tax withholding statements subject to submission has been expanded to include all for all employees and tax withholding statements for employees must also be submitted to the relevant tax office and the head of the local municipality. This applies to tax withholding statements for severance pay, etc., paid on or after January 1, 2026. Therefore, when carrying out the consolidated submission procedure for the pertinent tax office, the scope of documents to be consolidated will differ between FY2025 and the fiscal years 2026 or later.
If you consolidate and submit the tax withholding statements for recipients in fiscal year 2025 to the competent tax office, the submissions will only relate to executives. However, if you consolidate and submit the tax withholding statements for recipients in fiscal year 2026 to the competent tax office, the submissions will relate to all employees.
Handling of Unpaid Severance Pay as of Year-end
Even if the recipient is an employee, submission to the competent tax office is required for tax withholding slips, etc., related to severance pay, etc., payable on or after January 1, 2026. If a consolidated submission to the tax office is applied, employees who receive severance pay, etc., in 2026 are also included in the consolidation scope.
However, even if the payment of severance pay, etc., to employees is made on or after January 1, 2026, if the severance pay, etc., was unpaid as of the end of the 2025 fiscal year, there is no need to submit tax withholding statements, etc., for such employees to the relevant tax office. This is because such severance pay, etc., falls under retirement income for the 2025 fiscal year.
For example, if Employee A retired on December 28, 2025, but the payment of severance pay was not completed by the end of 2025 and was actually finalized on January 15, 2026, there would be no need to submit tax withholding statements for Employee A's retirement income to the competent tax office. Even if a consolidated submission were made, such payments would not be included in the consolidation.
On the other hand, if Employee B's last day of work was December 21, 2025, but due to the use of paid leave, the actual (official) retirement date became January 18, 2026, and the retirement allowance was paid on the latter day, the tax withholding statement for the retirement income of Employee B would have to be submitted to the competent tax office. It would also be included in a consolidated submission. The treatment differs depending on whether the retirement date is in 2025 or 2026, so please be careful about this.
Online Inquiries by the NTA for Information on Deposits and Savings, etc. are Rapidly Expanding
Introduction
The National Tax Agency (NTA) conducts online inquiries to financial institutions such as banks to obtain information on deposits and savings accounts of account holders for tax audits and past-due tax collection. This system has been in place for nearly four years, since its implementation in October 2021. While paper-based inquiries can take several weeks, online inquiries allow the agency to obtain such information within a few days, significantly contributing to the efficiency of tax audits and other procedures.
Over 70% of Domestic Financial Institutions are Already Participating
As of the end of fiscal 2024, 431 financial institutions, or more than 70% of all financial institutions in Japan, are able to respond to online inquiries regarding deposit and savings account information (such as the existence of an account, and deposit/withdrawal records) for individuals subject to tax audits or other procedures.
As of the end of fiscal year 2021, only 37 institutions were able to so respond, but this number has increased by nearly 400 institutions over three years. The NTA aims to increase the number of financial institutions complying with online inquiries to 450 by the end of fiscal year 2025. These figures include major domestic banks, regional banks, credit unions, and internet banks.
【Trend in the number of financial institutions supporting online inquiries】
| End of fiscal year 2021 | 37 institutions |
|---|---|
| End of fiscal year 2022 | 61 institutions |
| End of fiscal year 2023 | 211 institutions |
| End of fiscal year 2024 | 431 institutions |
| End of fiscal year 2025 (target) | 450 institutions |
Expansion to Life Insurance Companies and Securities Firms
Since fiscal year 2022, the NTA has begun online inquiries regarding insurance contract information from life insurance companies, in addition to financial institutions. By the end of fiscal year 2024, six life insurance companies had begun implementing such compliance. Additionally, since fiscal year 2024, the NTA has started online inquiries regarding securities account information with securities companies, with two securities companies reportedly complying with such requests by the end of fiscal year 2024.
The Number of Inquiries has Increased More than Threefold
The number of online inquiries to financial institutions, including life insurance companies and securities companies, was about 280,000 in fiscal year 2021 when online inquiries began, approximately 2.63 million in fiscal year 2022, and has increased more than threefold by fiscal year 2024 compared to fiscal year 2022.
Credit Card Companies are Also Beginning to Respond
Online inquiries are being promoted across the government, with the Digital Agency taking the lead and coordinating with relevant ministries and agencies. The NTA plans to work with those relevant ministries and agencies to extend the period for which deposit and withdrawal records are subject to online inquiries, and to increase the number of financial institutions and other entities that can respond to online inquiries.
Additionally, in addition to financial institutions, the agency will request cooperation from other entities such as payment service providers (e.g., the operators of 〇〇 Pay) and credit card companies to respond to online inquiries, with the aim of expanding the range of industries and businesses that can handle online inquiries.
Hiding Assets is Difficult
As such, the number of online inquiries to financial institutions and other entities is increasing at an astonishing rate, and is very unlikely to decrease in the future. For example, when filing an inheritance tax return, it becomes clear that hiding deposits or savings held at domestic financial institutions and other entities is virtually meaningless when dealing with the National Tax Agency.
If hiding assets becomes possible, honest taxpayers who declare their income accurately would be at an unfair disadvantage.
For the sake of taxpayers who file accurately, we hope that efforts to streamline tax audits will be further advanced.
