In May 2024, the government officially announced its policy to impose social insurance premiums on financial income earned through designated accounts (with withholding tax).
While the policy is expected to be phased in starting with “elderly individuals aged 75 and older,” experts have pointed out that the scope may eventually be expanded to include the entire population.
This article explains the mechanics of this legislative amendment, the extent of the increase in social insurance premiums, future risks, and practical measures individuals can take to protect themselves.
- What Is a Designated Account? The “Biggest Benefit” You’ve Enjoyed Until Now
- Not having to file a tax return means that financial income is not included in the local
- What will change with this legislative amendment?
- Why Is This Revision Called a “Stealth Tax Hike”?
- How much will social insurance premiums jump?
- The Risk That the Scope Will Expand to “All Citizens” in the Future
- What will happen to NISA and the treatment of investment losses?
- Four practical defensive measures individuals can take
- Summary | Moving Away from Reliance on Designated Accounts and Gathering Information Early
What Is a Designated Account? The “Biggest Benefit” You’ve Enjoyed Until Now
There are primarily the following three types of securities accounts.
- General Account
- Designated Account (With/Without Withholding Tax)
- NISA Account
Until now, the main reason the “Designated Account (with Withholding Tax)” has been so popular was that approximately 20% tax is automatically withheld on profits from stocks and mutual funds, eliminating the need to file a tax return.
Not having to file a tax return means that financial income is not included in the local
government’s “income calculation.”
As a result, there was a significant advantage: even if you had investment profits in addition to your salary and pension, your social insurance premiums would not skyrocket.
What will change with this legislative amendment?
Income from Designated Accounts for Those Aged 75 and Older Will Be Subject to Social Insurance Premiums
Under a policy decided in May 2024, participants in the Late-Stage Elderly Healthcare System who are 75 years of age or older will have their financial income earned through designated accounts included in the calculation of social insurance premiums, even if they do not file a tax return.
As a result, the advantage of the designated account—that “social insurance premiums will not increase if you do not file a tax return”—will effectively be lost.
Implementation Within “Five Years”
To allow for a preparation period for system integration and data standardization using platforms such as Myna Portal, the actual implementation is set to begin within five years of the Cabinet’s decision.
Why Is This Revision Called a “Stealth Tax Hike”?
This amendment is not a “tax rate increase (tax hike)” but rather a “change in the method for calculating social insurance premiums.”
Therefore, the government can explain that “this is not a tax hike.”
However, from the public’s perspective, it will have the following impacts, making it effectively no different from a tax hike.
- Significant increase in social insurance premiums (such as health insurance premiums)
- Increase in the out-of-pocket copayment rate for medical expenses in line with rising income (e.g., from 10% to 20%, or from 20% to 30%)
- A structure in which the higher the investment returns, the more directly the burden is felt
Furthermore, by initially limiting the scope to those “aged 75 and older,” the government is diverting the attention of the working-age population and proceeding in stages to minimize the likelihood of a nationwide opposition movement.
This has been criticized as a “stealth tax hike.”
How much will social insurance premiums jump?
Depending on the amount of financial income, there is a risk that monthly premiums could surge.
- If your annual financial income from a designated account is 5 million yen
Your annual social insurance premiums could increase by approximately 500,000 yen - Impact
There are cases where people who previously paid about 10,000 yen in annual premiums are suddenly required to pay more than 500,000 yen.
The Risk That the Scope Will Expand to “All Citizens” in the Future
Since people aged 70 and older hold approximately 40 percent of Japan’s financial assets, it is generally believed that starting with the elderly population was the politically smoothest approach; however, tax and financial experts predict the future trend as follows.
- Ages 75 and older (elderly in the later stage)
- Ages 70 and older
- Ages 65 and older (elderly in the earlier stage)
- The entire population (including the working-age population)
If the scope of the program continues to expand in this phased manner, the tax advantages of designated accounts will disappear entirely.
This is by no means someone else’s problem, even for those currently in the workforce.
What will happen to NISA and the treatment of investment losses?
Are NISA accounts safe?
Under the current system, investment gains from the new NISA are tax-exempt, and the policy is that they will not be included in the calculation of social insurance premiums.
However, the government does not legally guarantee that “social insurance premiums or special taxes will never be imposed on NISA accounts in the future.”
It is important to note that, as with iDeCo (Individual-Type Defined Contribution Pension) in the past, there is a non-zero risk that the rules could change after the system becomes established.
What happens if investment returns are negative (a loss)?
In years when financial income is negative, social insurance premiums will not increase. However, if you do not file a tax return while leaving the withholding tax on your specific account as is, you will not be able to offset the loss against other income (through loss carryforward). This raises concerns about an asymmetric burden: social insurance premiums will increase only in years with a profit, while they will not be reduced in years with a loss.
Four practical defensive measures individuals can take
1. Prioritize Using the New NISA Limit
At this point, the most effective protective measure is to utilize NISA.
The basic strategy is to prioritize filling the tax-free investment limit—3.6 million yen per year, with a lifetime limit of 18 million yen.
2. Utilizing the NISA Limits for the Entire Household
To prepare for the risk of eligibility being expanded to the entire population, it is effective to ensure that the NISA limits of spouses and family members are also fully utilized for investments.
3. Consider Establishing a Micro-Corporation
For those with substantial assets, there is the option of establishing a micro-corporation (asset management company) to manage the assets rather than doing so as an individual.
By enrolling the corporation in the social insurance system, it may be possible to control the sharp increase in an individual’s social insurance premium burden to a certain extent.
4. Monitoring Policy Trends and Voicing Your Opinions
Revisions to social insurance premiums and tax systems are sometimes reconsidered in response to public opinion or public backlash.
It is important to remain attentive to trends in legislative amendments.
Summary | Moving Away from Reliance on Designated Accounts and Gathering Information Early
While this legislative amendment will initially apply to those “aged 75 and older,” this is merely the first step in the system overhaul.
- The Benefit of “No Need to File a Tax Return = No Increase in Social Insurance Premiums” for Designated Accounts Is Coming to an End
- There Is a Risk of Increased Social Insurance Premiums Based on Financial Income
- Going forward, it will be necessary to consider expanding the scope to include the working-age population
Those who are building their assets should reevaluate investment strategies that rely solely on designated accounts and take early steps to utilize NISA and plan for future asset management strategies.
