LDP, DPFP Reach Deal to Hike Taxable Income Threshold to ¥1.78 Mil.; Income Cap for Full Basic Deduction Will Also Rise to ¥6.65 Mil.

The Yomiuri Shimbun

17:53 JST, December 19, 2025

The Liberal Democratic Party and the Democratic Party for the People have agreed on a deal to raise the taxable income threshold from ¥1.6 million to ¥1.78 million.

During a meeting at the Diet on Thursday, Prime Minister Sanae Takaichi, who also serves as the LDP president, and DPFP Leader Yuichiro Tamaki signed an agreement addressing the so-called “annual income barrier,” which is the income threshold at which income tax is first imposed.

In response to demands from the DPFP, the government will implement a substantial increase in deductions for middle-income earners for two years to boost their after-tax income.

These changes were added into the fiscal 2026 tax reform plan, which the ruling coalition finalized on Friday.

Takaichi spoke to reporters after the meeting, emphasizing, “I made my final decision in hopes of creating a virtuous cycle — rising incomes will bolster consumer sentiment, which will drive up business profits.”

In addition to raising the income barrier to ¥1.78 million, the government will expand the income bracket for those eligible for the full basic deduction, widening it from the current ¥2 million or less to up to ¥6.65 million.

About 80% of all taxpayers are set to benefit from this change. The application of the ¥6.65 million limit will be restricted to a two-year period, spanning 2026 and 2027.

The LDP made these concessions to the DPFP to address their demands for increasing after-tax income for middle-income earners, though the changes are expected to reduce tax revenue by an amount estimated at around ¥650 billion.

The government also plans to review the structure of income tax deductions within three years, with an eye toward the introduction of a “ tax credit and benefit system,” which would combine benefits and tax cuts.

In December last year, the LDP, Komeito and the DPFP agreed to work toward raising the annual income barrier to ¥1.78 million.

However, during the discussions on the fiscal 2025 tax reform, the parties could not reach an agreement on funding and other issues.

They settled for a smaller increase, setting the target at ¥1.6 million. However, the DPFP continued pushing for the original target.

An agreement was reached to eliminate the environmental performance tax, which was a levy of up to 3% on car purchases based on fuel economy.

Although the government and the ruling coalition initially considered suspending the tax for two years, they ultimately agreed to the DPFP’s demand to eliminate it completely.

They plan for the time being to maintain the dependent deduction that reduces the income tax burden for parents with high school-aged children between 16 and 18 years old.

The agreement also includes a commitment to ensure the early passage of the fiscal 2026 tax reform and budget proposals within the current fiscal year.

This marks a significant shift from the previous fiscal year, when the DPFP opposed both measures.

“We were able to overcome this challenge together, and our mutual trust has grown stronger. I believe we are now positioned to cooperate toward the passage of the budget,” Tamaki said at a press conference.