Retirement income deduction and the one-half rule: how the tax burden on executive retirement allowances worksThere is a rule that makes tax lighter on the retirement pay of people who worked a long time
For a retirement allowance, the retirement income deduction based on years of service is subtracted, and half of the result becomes the amount of retirement income, which is taxed separately from other income. However, there are special rules limiting the one-half rule for specified executive retirement allowances (where service as an executive is 5 years or less) and short-term retirement allowances (short service).
- Base deduction
- JPY 8,000,000
- + JPY 700,000 × (30 years - 20 years)
- JPY 7,000,000
- Retirement income deduction
- JPY 15,000,000
Key points
- Retirement income = (payment amount - retirement income deduction) × 1/2 (in principle)
- Retirement income deduction: for service of 20 years or less, JPY 400,000 × years of service (JPY 800,000 if that is less than JPY 800,000); for over 20 years, JPY 8,000,000 + JPY 700,000 × (years of service - 20). Fractions of less than one year are rounded up to one year
- If the person retired as a direct result of becoming disabled, JPY 1,000,000 is added to the deduction
- Specified executive retirement allowances (years of service as an executive of 5 or less) get no one-half rule. For short-term retirement allowances (non-executives with 5 years of service or less), the one-half rule does not apply to the part exceeding JPY 3,000,000 after the deduction
- If the "Declaration for Receiving Retirement Income" has been submitted, the payer calculates the tax by withholding, and in principle no tax return filing (kakutei shinkoku) is needed. If it has not been submitted, 20.42% of the payment is withheld
What to do in practice
- Have the person receiving the retirement allowance submit the "Declaration for Receiving Retirement Income" before payment
- If an executive's years of service are 5 or less, reflect in the estimate that the one-half rule cannot be used
If the retirement pay you get when leaving a company were taxed the same way as your regular pay, the tax would be far too heavy. So there is a rule that lets people who worked longer subtract more, and then the leftover is cut in half before tax is figured. This is not a trick; it is a system set by the government.
- 1. Retirement payYou receive retirement pay from the company
- 2. SubtractAn amount decided by your years of service is subtracted
- 3. HalfThe remainder is cut in half
- 4. TaxThe tax is figured from that amount
Points
- The longer you worked, the bigger the amount you can subtract when figuring the tax
- After subtracting, the amount is normally cut in half before the tax is figured
- If you hand in a "declaration" to your company, the company also takes care of the tax procedures
What the words mean
- Retirement income (退職所得)
- The name used in tax calculation for money such as retirement pay you get when leaving a company
- Withholding (源泉徴収)
- A system where the company paying you takes the tax out first and pays it to the government
- National Tax Agency (NTA): National Tax Agency (NTA): No.1420 When you receive a retirement allowance (retirement income)
Tax-saving information introduces systems permitted by law. Each has conditions for application, and this is not encouragement of tax avoidance. Please consult a tax accountant or other professional before applying.
This article summarizes and explains materials published by government agencies and is not advice on any individual case. Rules can change, so for actual procedures and decisions always check the latest original materials and consult professionals such as tax accountants or labor and social security attorneys. English, Simplified Chinese and Traditional Chinese versions are translations prepared from the Japanese articles for convenience. If anything differs, the Japanese text and the original source take precedence.