Last week, we reported that the Israel Tax Authority (ITA) has directed the tax assessing officers to automatically increase the exempt portion of severance pay to 150 percent of the last monthly salary times the number of years’ employment, but subject to monetary limits of, currently, NIS 11,390 (upon termination) or NIS 22,280 (upon death) per year of employment.A reader wrote: “If one leaves a job voluntarily, is one entitled to severance pay (pitzuim)? If one worked for NIS 10,000 per month for 15 years, one is entitled to NIS 150,000 in severance pay? I don’t understand the 150% exemption.”SEVERANCE PAY In reply, the Severance Pay Law, 1963, specifies a long list of cases in which an employer must pay severance pay. The main case is dismissal (firing) of the employee after a year’s continuous employment. Others include voluntary departure due to maternity, moving to certain agricultural or development areas, death of employer, death of employee, poor health of the employee or a family member, substantial worsening of work conditions, and more. Severance pay may also be paid voluntarily or pursuant to a collective firstname.lastname@example.org Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.This is a complex area and anyone wanting more information should consult an employment lawyer, as well as a pension advisor and/or the human-resources department at their place of work.Sometimes, an employer puts money to one side each month in a severancepay deposit fund in case of future dismissal.In other cases, the employer avoids the need to pay severance pay by depositing money in an approved pension plan each month.The amount typically put to one side or deposited is 8.33% (one-twelfth) of gross salary, as this helps finance a severance payment of one month per year of employment. A catch-up deposit is sometimes paid if the employee gets a pay raise. In some cases, an employer may decide to make a bigger severance payout; for example, if employment relations were good or there are mass redundancies in a company as part of a corporate recovery plan. The payout may be 150%, 200% or even more of the required payment. The Israeli tax law does not distinguish between compulsory and voluntary severance payments; it merely prescribes limits on the tax exemption allowed, regardless of why the employee left the employer.So take the example of an employee who leaves a job voluntarily after 15 years, whose last monthly salary was NIS 10,000 per month. In such a case, the employer probably isn’t obliged to pay the employee anything but may choose to do so voluntarily.If the employer pays the employee a lump sum of, say, NIS 250,000 upon a mass redundancy, an exempt amount of NIS 225,000 may now be allowed (NIS 10,000 times 150% times 15 years). The remainder of the severance payout of NIS 25,000 (NIS 250,000 minus NIS 225,000) will be added to the individual’s income and taxed at regular Israeli tax rates.Who else can benefit from this new 150% rule? Proprietors of companies that employ them can. For example, Joe owns a company that just sold its business and assets at a substantial gain, and Joe wants to retire. Taking an exempt severance payment may be a useful alternative to taking a dividend from the company and/or liquidating the company, among other possibilities.But check the amounts and mathematics in each case. Advance tax planning may be worthwhile.UK PENSIONS The ITA has tightened up its policy regarding UK pensions. The current UK-Israel tax treaty grants an exemption from UK tax to Israeli residents who receive a pension from the UK, provided the pension is subject to UK tax. The problem is that olim (new residents and “senior returning” residents who lived abroad for five to 10 years) are exempt from Israeli tax for up to 10 years on their UK pensions and other non-Israeli-source income and gains.UK olim became accustomed to request to pay Israeli tax “voluntarily” at a rate of only 10%, with a view to avoiding UK tax at potentially higher rates (now up to 50%). However, the UK government took a dim view of such shenanigans. Consequently, the ITA has in recent years stopped issuing 10% tax rulings, at least at the national level, but backwater local tax offices didn’t always toe the line. Now, Aharon Eliahu, the senior deputy director of the ITA, has directed all ITA offices that tightens up the taxation of UK pensions – temporarily.The directive claims that the Israeli tax law (ITO Sec 14(a)) doesn’t actually specify a reduced tax rate; it instead allows olim to request an exemption on any part of their foreign income (leaving the UK free to tax that same part). Unfortunately, this may not be accurate: Section 14(a) allows the oleh to request “something else” (“acheret”) on part or all of his foreign-source income. There is a view that something else can include a reduced tax rate.Nevertheless, the directive says UK olim can legitimately pay tax in Israel and not the UK on their UK pensions, after availing themselves of the following Israeli tax reliefs: (1) Israeli tax not to exceed the UK tax that would have applied if the oleh had remained a UK resident; or (2) exemption for 35% of the pension for UK olim of retirement age (men 67, women 64, generally) and tax on the remaining 65%, subject to detailed rules.What should UK olim do? One possibility is to accept the above until a draft Israel-UK tax treaty takes effect; this will exempt a UK pension paid to an Israeli resident regardless of whether Israel taxes the pension. The draft treaty awaits ratification, which could tale a year or two.Another alternative is to export the pension out of the UK under detailed UK rules relating to QROPS (Qualified Recognized Overseas Pension Schemes), as discussed in this column in the past. Some UK olim have followed the QROPS route. Further information is available upon request or from your UK pension advisor.As always, consult experienced tax advisors in each country at an early stage in specific cases.