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Pension Contributions for an Atzmai

Pension contributions

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 the atzmai pension contribution obligation. 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 self-employed persons who are registered either 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 atzmai pension contributions is determined according to your taxable incomewhich 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 1/1/2023 that the average monthly salary is NIS 11,870. If so, up to an income of NIS 5,935, 4.45% must be deposited, which is NIS 267 per month (or NIS 3,205 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 5,935 to NIS 11,870. This amount reaches up to an additional NIS 745 per month.

On income above the average wage in the economyThere 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 5,935 (NIS 267 per month)
And another 12.55% of the remaining NIS 1,565 (NIS 196 per month).
Total monthly deposit of (267 + 196) = NIS 463.

Example 2:

Sarah earns more than NIS 11,870 per month.
She will pay 4.45% on the portion of his income to NIS 5,935 (NIS 267 per month)
And another 12.55% for the remaining NIS 5,935 (which is NIS 745 per month).
Total monthly deposit of NIS 1,012, amounting to an annual provision of NIS 12,144 for the year.
She will not be obligated to make any contributions form her income above NIS 11,870.

In summary - the maximum contribution for those who earn the average wage, or more is NIS 1,012 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 atzmai 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 can be imposed on those who did not deposit into the pension fund on time.

How to set-up a Pension?

Choosing the right pension scheme may seem insignificant now, but can make a huge difference when you reach retirement. It is recommended to reach out to a pension advisor who will explain to you the different options so that you can make an informed decision. If you're looking for an English speaking pension & investment advisor you may wish to get in touch with a reputable company such as Goldfus Insurance.

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Boruch Levenson - CPA

A native English speaker qualified in both Israel and the UK, Boruch cares for the English speaking clients.

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Our consultants in Jerusalem

English speaking accountants in Israel
Address: Kanfei Nesharim 68. Merkaz Oranim
Phone number: 02 631 9000
Fax: 02 631 9005
Email: office@cpa-dray.com