Types of members: The tax law distinguishes between “privileged” and “non-privileged” members of a provident fund who may also be employed or self-employed.
A privileged member is one who contributes at least 16% of the average national salary (NIS 9,906 per month in 2018), i.e., contributes at least NIS 19,020 for the 12 months of 2018.
Employee contributions: Once employees have worked three to six months at a firm, they are entitled to mandatory pension and severance funding. The stipulated minimum pension fund contribution is 18.5% of gross salary. The employer generally pays 6.5% toward pension funding and 6% toward severance funding. The employee pays 6% toward pension funding.
“Study funds” (hishtalmut) are also common but not mandatory – the employer usually pays 7.5% of gross salary and the employee 2.5% up to prescribed limits.
The employer deducts his cost for tax purposes and the employee is exempt and can use the money for any purpose if no withdrawals are made for six years.
Self-employed contributions: The self-employed must by law (since 2017) contribute 4.45% up to half the average national salary, and thereafter 12.55% of income up to the national average salary into a pension-unemployment fund. If the individual is also employed, employee and employer contributions count toward this requirement.
A voluntary study fund arrangement is available to the self-employed. They can contribute 7% and deduct 4.5% as an expense within prescribed limits.
Tax breaks: Israel provides a complex set of tax deductions and tax credits for pension contributions.
Tax deductions for privileged members: First, the amount paid up to 11% of income up to NIS 104,400 per year minus “assured income” is deductible. “Assured income” is pensionable salary on which an employer funds a pension.
Second, the amount paid up to 7% of “additional income” is deductible on contributions exceeding NIS 19,020 (privileged member minimum contribution), up to the lower of: assured income up to NIS 104,400, or, total taxable income up to NIS 261,000, less assured income or NIS 104,400, whichever is higher.
If the contributions exceeds 12% of “additional income,” a further 4% deduction is possible, i.e., 11% instead of 7%.
Tax deductions for non-privileged members: Self-employed: The amount paid up to 7% non-salary income up to NIS 146,400 for the year. But if the individual is also an employee, this amount is reduced by the lower of NIS 104,400 or salary, whichever is lower.
If the contributions exceeds 12% of income, a further 4% deduction is possible, i.e., 11% instead of 7% of income up to NIS 146,400 = NIS 16,104.
Employees: The lower of the amount paid, up to 5% of non-assured salary up to NIS 104,400; 5% of taxable salary income up to NIS 261,000 minus assured income.
Higher limits apply if the non-privileged member was aged over 50 at the beginning of the year.
No deduction is allowed if assured income exceeds NIS 261,000 for the year.
Tax credit for privileged member: A 35% tax credit is allowed for amounts contributed towards pension and life insurance, up to limits.
If there is no salary income, the limit is 5% of income up to NIS 208,800 for the year. If there is assured (pensionable) salary income, the limit is 7% of such assured income up to NIS 208,800 minus NIS 104,400 or assured income, whichever is less, if there are also self-funded pension contributions.
Tax credit for non-privileged member: A 35% tax credit is allowed for amounts contributed towards pension and life insurance up to limits. If there is no salary income, the limit is 5% of income up to NIS 146,400 for the year.
If there is salary and other income, the limit is 7% of such salary income up to NIS 104,400 and business income up to NIS 146,400 minus NIS 104,400 or salary income, whichever is less.
Major shareholders: Major shareholders (10+%) of companies should consider pension funding and severance funding within prescribed limits, plus side-plan funding under Amendment 190 of the Income Tax Ordinance.
Severance pay funding regarding major shareholders is not deductible as a corporate expense above 8.33% of salary or NIS 12,230 per year.
Life insurance and disability funding: A 25% or 35% tax credit for life insurance premiums is available on upon to 5% of entitling income within complex limits.
To sum up: These rules are complicated and open to alternative interpretations. Always consult a qualified Israeli pension/insurance specialist.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.