Will the Year-End Tax Adjustment Refund Increase with a Basic Deduction of 1.04 Million Yen? An Explanation of the Changes Salaried Employees Need to Know

Under the 2026 tax reform, the “basic deduction” for income tax will be raised to a maximum of 1.04 million yen.
As a result, the take-home pay of many salaried employees and part-time workers will increase, and tax refunds during the year-end tax adjustment in December 2026 may be higher than in previous years.

In this article, we’ll explain how the “1.04 million yen basic deduction” works, its impact on year-end tax adjustments, and how much your tax refund will increase.

What is the 1.04 million yen basic deduction?

The basic deduction is an income deduction available to everyone when calculating income tax.
As a result of the tax reform for fiscal year 2026 (Reiwa 8), the amount of the basic deduction for income tax has been revised.
For individuals with total income of 4.89 million yen or less, the basic deduction will be up to 1.04 million yen.
A comparison of the previous and revised amounts is as follows.

Before the Amendment

• Up to 950,000 yen

After the Revision (2026–2027)

• Up to 1.04 million yen

In other words, since the amount of taxable income is further reduced, income tax is reduced by that same amount.

Why Are Tax Refunds Increasing?

Income tax is withheld from the monthly salaries of many salaried employees.
However, since these tax reforms will take effect in December 2026, the amount withheld from January through November will be calculated under the existing rules.
The National Tax Agency has also announced that “there will be no changes to withholding procedures through November of Reiwa 8.”

So,

1. Income tax is collected under the old system from January through November
2. Applying the New System During the Year-End Tax Adjustment in December
3. Overpaid taxes will be refunded

That’s how it works.

As a result, many salaried workers may receive larger tax refunds than usual.

The salary income deduction will also be increased

In this amendment, not only was the basic deduction revised, but the minimum guaranteed amount for the salary income deduction was also revised.

• Before the amendment: 650,000 yen
• After the amendment: 740,000 yen

…will be raised to.

The salary income deduction is similar to a deduction for necessary business expenses for salaried employees.
Since both the basic deduction and the salary income deduction increase, taxable income is further reduced, which ultimately leads to a higher take-home pay.

What will happen to the “1.03 million yen threshold”?

One of the major talking points surrounding this amendment is the “1.03 million yen threshold.”
Until now, 1.03 million yen was the threshold below which no income tax was due, but due to the expansion of the basic deduction and the salary income deduction, the threshold for being exempt from income tax will be raised to 1.78 million yen.

However, it’s important to note that,

• The Income Tax Threshold
• The Resident Tax Hurdle
• The Social Insurance Barrier

is that it is a separate system.

Even if the criteria for income tax change, the criteria for social insurance enrollment do not automatically change.

How much is the tax reduction by annual income level?

According to estimates by tax accountants and tax information websites, the tax savings vary depending on annual income.

Annual income of 3 million yen

Estimated Tax Reduction Amount

About 8,000 yen

Annual income of 4 million yen

Estimated Tax Reduction Amount

About 8,000 yen

Annual income of 5 million yen

Estimated Tax Reduction Amount

Approximately 28,000 to 30,000 yen

Annual income of 6 million yen

Estimated Tax Reduction Amount

Approximately 37,000 yen

Annual income of 7 million yen

Estimated Tax Reduction Amount

About 8,000 yen

It is generally believed that office workers with annual incomes of around 5 million to 6.5 million yen stand to benefit the most.

What steps are required for year-end tax adjustments?

Basically, it’s the same as usual.

Distributed by the employer

• Basic Deduction Return
• Spouse Deduction, etc. Declaration Form
• Insurance Premium Deduction Form

It’s fine to simply submit these items, etc.

No special application procedures are required.

However,

• I have income from a side job
• I resigned in the middle of the year.
• Annual income over 20 million yen

In certain cases, such as these, you may be required to file a tax return.

The criteria for the dependent deduction will also change

The income requirements for dependents have also been revised as part of this amendment.
The previous guideline, which set the threshold at 1.23 million yen or less in salary income, has been raised to 1.36 million yen or less.

When it comes to part-time jobs for college students in particular,

• Dependent Deduction
• Special Deduction for Specified Relatives

As the scope of this measure expands, it is expected to reduce the tax burden on parents.

Impact on Freelancers and Sole Proprietors

While salaried employees have this handled through year-end tax adjustments, self-employed individuals and freelancers must apply it through their annual tax returns.
For income earned in 2026, the new basic deduction will be reflected in the tax return filed in 2027.
Therefore, it is important to keep track of the revised deduction amounts in addition to maintaining your books and recording expenses.

Important Note | Resident Tax Generally Remains Unchanged

There are some points in this amendment that are easy to misunderstand.

That is,

The basic deduction for resident tax remains unchanged

That is the point.

In other words,

• Income tax will go down
• Resident tax will remain largely unchanged

This tends to happen more often.

Therefore, it is a misconception to think that “all taxes will be lowered.”

Summary

Under the fiscal year 2026 tax reform, the basic deduction will be raised to a maximum of 1.04 million yen, and the salary income deduction will also be expanded.

To summarize the main points:

• The basic deduction will increase to a maximum of 1.04 million yen
• The salary income deduction will also be raised to 740,000 yen
• The minimum income threshold for income tax has been raised to 1.78 million yen
• You can expect a larger tax refund during the year-end tax adjustment in December 2026
• The benefits are significant for those with an annual income of around 5 million to 6.5 million yen
• The criteria for determining dependent status will also be relaxed
• Resident tax and the social insurance system are governed by separate rules

That’s the gist of it.

The year-end tax adjustment for 2026 is one of the most significant changes to the system in recent years.
It’s a good idea to review your pay stubs and withholding tax statements to determine how much you’ll benefit from the tax cuts.