The government and the ruling parties are considering applying a higher income tax exemption threshold from January 2026, in a move to incentivize part-timers to work longer hours amid Japan’s labor shortage, a source close to the matter said Tuesday.

The schedule is expected if the government decides on raising the threshold for imposing income tax, currently set at a minimum annual income of 1.03 million ($6,900), in its tax reform plan for the next fiscal year starting April. Related bills will be subsequently deliberated in the Diet for likely enactment around the spring.

The Liberal ruling Democratic Party and its coalition partner the Komeito party, which lost their majority in the powerful House of Representatives in October’s general election, have agreed to accept a request from a minor opposition party, the Democratic Party for the People, to increase the nontaxable income threshold.

The extent of the ceiling expansion has not yet been decided, but the DPP is pushing for setting the line at 1.78 million yen.

The LDP and Komeito have been exploring cooperation with the DPP, which saw its seats surge in the election, on a policy-by-policy basis in order to run a stable minority government.

The government and the ruling parties believe that the earliest the higher threshold can be introduced is January 2026 considering the time needed to publicize the new system after related bills are enacted and for companies to prepare.

The DPP, however, wants the higher ceiling to be applied from January 2025. In that scenario, the government and the ruling parties would have to consider offering subsidies or other tax relief measures to effectively provide the same amount of income tax exemption.

The 1.03 million-threshold has been seen as discouraging part-time workers, especially housewives and students, from working longer hours, adding to the pressure of Japan’s labor shortage.

While lifting the threshold will reduce annual tax revenues, DPP leader Yuichiro Tamaki, a former Finance Ministry bureaucrat, has argued increasing people’s disposable income will boost consumption, leading to higher corporate earnings and tax revenues.

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