Tax benefits in Israel
Keren Ishtalmout, pension, investment fund, Koupat Guemel... In Israel, there are a multitude of social security contributions.
These contributions give taxpayers significant tax breaks.
Given the diversity of existing contributions, many taxpayers are unaware of the various advantages.
Here's the main information on these benefits, whether you're an employee or self-employed. (The figures given here are current to the year 2022).
Pension contributions for self-employed workers in Israel
Since January 2017 the law obliges all self-employed people to contribute for their retirement according to the following percentages:
- Up to a monthly income of 5,935 shekels, the percentage contributed for retirement is 4.45% of the salary.
- Up to a monthly income of 11,870 shekels, the pension contribution percentage is 12.55% of the salary.
- Above 11,870 shekels monthly income, no additional contributions are required.
However, it's advisable to do so - see below for possible optimizations.
So let's take a look at the amounts you can deduct from your taxes in Israel, by virtue of pension contributions and/or keren ishtalmoute :
Pension contributions for self-employed workers in Israel.
A self-employed person who makes pension contributions can deduct them as a tax expense.
Up to a maximum percentage of 16.5 % of gross annual income.
The maximum tax deduction for the self-employed for the 2023 tax year is 37,224 shekels a year, or 3,102 shekels a month.
This means that the maximum gross annual income on which you can claim a deduction is 225,600 Shekels. Beyond this amount, the deduction will not be recognized for tax purposes.
Advantages of contributing to a keren ichtalmoute as a self-employed worker in Israel
A self-employed person who contributes to a keren ichtalmoute will be able to deduct the amount of his contribution, up to a maximum percentage of 4.5%.
The maximum amount that the self-employed person can deduct for the 2023 tax year is 12,776 Nis. (or 1,065 Nis monthly).
However, it is advisable to contribute up to the annual limit on which interest is not taxable (19,920 Nis).
Very important: all these contributions will only be recognized as tax expenditures for the year 2023 if they were contributed in 2023.
If you wait until 2024 to contribute, these contributions will only be considered tax expenditures for the 2024 tax year.
So don't miss the opportunity to deduct your taxes for 2023.
In view of the complexity of the different contribution models in Israel, we strongly recommend that you consult specialists who can optimize your tax situation.
Why contribute to a Keren Ishtalmout?
There are 2 advantages to contributing to a Keren Isthalmout:
1. Expenses recognized for your company.
Contributing to a Keren Ishtalmout will create a tax-deductible expense for the company.
This additional contribution (employer's portion of 7.5%) does not appear on your payslip. So you create a tax-deductible expense, without having to pay income tax on it.
2. Accumulated interest is tax-exempt.
Capital and interest earned on Keren Ishtalmout are fully tax-exempt.
This is on condition that you only withdraw the gains after a minimum period of 6 years.
Tax benefits for employees in Israel
An employee must contribute to his pension as follows:
- 6% of gross salary will be deducted from his salary as an employee contribution.
- 6.5% will be contributed by the employer.
- Finally, 6% will go to severance pay. (פיצויים).
It is important to note that some employees prefer to contribute the maximum percentage allowed by law, i.e. 7% instead of 6%.
Of the amount contributed by the employee (i.e. 6%), 35% will be recognized as tax credits.
In other words, you save 35% on your personal contributions to your pension fund.
This benefit is capped at a monthly salary of 8,600 shekels.
Let's take an example to illustrate:
An employee earns 10,000 shekels gross per month.
According to the law, the monthly contribution is :
6% (employee's personal contribution) * 35% * 8,600 shekels i.e.: 180.6 shekels / month.
However, as this contribution is less than the maximum contribution allowed (7%), our employee will be granted a maximum tax credit of : 35%*7%*10000=210 Shekels.
This contribution will be authorized by the fact that the monthly amount contributed is less than or equal to the maximum contribution authorized by law.
Keren Ishtalmoute contribution, as an employee.
By law, contributions to a Keren Ishtalmoute are not compulsory.
In the first instance, it is a benefit granted by the employer to the employee in the context of better salary conditions.
The contribution deducted from the salary is 2.5% for the employee and 7.5% for the employer. If the employee is a Baal Inyane (a person with decision-making authority within the company), the employer's contribution will be only 4.5%, not 7.5%.
The main tax advantage of Keren Ishtalmoute is that the employer's contribution is fully tax-exempt.
In other words, you receive 7.5% of your additional gross salary, tax-free.
It's important to note that under Keren Ishtalmoute, the maximum salary is capped at 15,712 Shekels/month.