Pension Contributions for self-employed: Who must deposit and how much?
The background
The Israeli government wants to ensure that all Israeli citizens can retire with financial security. Employers are legally obligated to arrange for the pension contributions for their employees However, the self-employed had no pension contribution obligations, and as a result, many self-employed individuals had no pension to rely on when they reached retirement.
This was until 2017, when the Israeli government introduced a mandatory pension contribution for the self-employed. The Compulsory Pension Law for the Self-Employed is intended to compare the situation of the self-employed with the situation of the employees and to allow them an annuity from which they will benefit when they retire.
Who must contribute to a pension fund?
The law stipulates that every self-employed person must contribute into a pension fund (or similar savings fund). Like employees, the level of contributions is set based on their level of income.
The law applies to a self-employed person who is registered as an Osek patur or Osek murshe.
Who does not need to contribute to a pension fund?
If a self-employed individual meets at least one of the following conditions, they will not be obligated to contribute to a pension fund.
If at the end of the tax year, beginning on December 31 of each year, one of the following occurred:
- The business was registered within 6 months of the year end.
- Aged younger than 21
- Aged older than 60
What are the minimum contributions to my pension fund?
The amount of your contribution is determined according to your taxable income, which is - income less expenses (recognized) and is divided into brackets:
For income up to half the average wage, 4.45% must be deposited. This year, the National Insurance Institute determined on 1.1.21 that the average salary is NIS 10,551. If so, up to an income of NIS 5,275.50, 4.45% must be deposited, which is NIS 237 per month (or NIS 2,844 for the full year).
For income above half the average wage - up to the full average wage, 12.55% must be deposited. That is, on the income from NIS 5,276 to NIS 10,551. This amount reaches up to an additional NIS 662 per month.
On income above the average wage in the economy, there is no obligation to deposit.
Example 1:
Joseph earns each month NIS 7,500.
He will pay 4.45% on the portion of his income to NIS 5,275.50 (NIS 237 per month)
And another 12.55% of the remaining NIS 2,224.50 (NIS 279 per month).
Total monthly deposit of (237 + 279) = NIS 516.
Example 2:
Sarah earns more than NIS 10,551 per month.
She will pay 4.45% on the portion of his income to NIS 5,275.50 (NIS 237 per month)
And another 12.55% for the remaining NIS 5,275.50 (which is NIS 662 per month).
Total monthly deposit of NIS 897, amounting to an annual provision of NIS 10,762 for the year.
She will not be obligated to make any contributions form her income above NIS 10,551.
In summary - the maximum contribution for those who earn the average wage, or more is NIS 897 per month.
Tip: Your contribution obligation is calculated based on your annual. As it’s often difficult for self-employed people to predict their taxable income during the year, they deposit estimated amounts and make additions at the end of the year. Alternatively, make a one-time deposit at the end of the year (provided your policy allows this).
What are the tax benefits of contributing to a pension?
In simple terms, the pension contributions will be treated as an expense, reducing your taxable income. This means that you will pay less Bituach Leumi and income tax!
However, if you deposit more than the mandatory amounts, there are limits to how much of your pension contributions carry tax benefits. If you wish to contribute more than the mandatory amounts, it is recommended that you discuss with a professional.
What happens if I don’t contribute?
A penalty of NIS 500 will be imposed on those who did not deposit into the pension fund on time. Individuals who earn less than minimum wage (NIS 5,300) will unlikely be issued a penalty if they did not make pension deposits.