by Yaakov Ehrenkranz
Now that chagim are over and we have returned to our routines, I thought it the perfect time to explain the different elements in our tlush, pay slip, and how we can maximize our salaries in Israel. I recently met a veteran oleh who confessed to never having checked his payslip properly, so this article is equally relevant to anyone who receives a tlush and doesn’t understand it fully. Tlushim need to be checked firstly because employers, like everyone else, can make mistakes, and secondly because there may well be ways to maximize your benefits.
For some olim a challenging or frustrating aspect of living in Israel is the relatively low salary that many people receive. A recent government report showed that the average monthly salary in Israel is 11,175 shekels, which, while it has been rising, might not sound like enough for some families to live on. (For those still thinking in dollars, it translates to less than $40,000 annually.) Moreover, when finally receiving a paycheck, it seems like the amount you actually get is often lower than the sum you were expecting. And to make matters even worse, the tlush you receive to explain it all can be very hard to understand. Whereas I will explain some of the basic information about your Israeli salary, including what happens to the money you were expecting, the information in this article should not be taken as advice on Israeli labor law.
There are three different numbers relating to your salary:
bruto – gross pay
neto – how much money you actually receive
alut – what it costs your employer to pay you that salary.
For example, if you are offered a salary of 10,000 NIS per month, that is generally the bruto number, but you may only receive 8,000 NIS neto, while the cost to your employer can be close to 12,000 NIS or even more. Understanding the disparity between those numbers will help understand why average salaries in Israel might seem lower than some other countries, but in reality sometimes aren’t so much less when one includes employee long term savings plans.
According to Israeli law every employee must have an employer linked retirement account, which is funded in part by the employer and in part by the employee. The employer must deposit between 6-7.5% of your bruto salary (this is an additional amount, not deducted from your gross pay) into a retirement plan for you, and you deposit a similar amount, another 6-7%, that comes out of your salary. In addition, the employer is required to put aside severance funds, pitzuim, which range from6-8.33%.The severance money can be withdrawn/paid to you if you stop working for your employer. (There are different arrangements and rules regarding the terms of separation which are too involved to be detailed here, but should you receive severance pay those funds become available once you have left that company). However, the pension money cannot be withdrawn without penalty until retirement age – 62 for women and 67 for men. In total, a minimum of 18.5% of your salary will be going into a pension account – mostly from your employer and some from you. This is a significant amount of your earnings which should be monitored carefully.
While basically inaccessible until retirement, the pension money is still yours and should be tracked. Depending on your age, your pension funds might be invested over a very long period of time, so it is vital you make good choices about how the funds work for you. Picking an appropriate investment track for your age and risk tolerance is crucial.
Pension accounts have management fees, dmei nihul, that are taken annually, and often paid on each deposit as well. Minimizing these fees can make a tremendous difference to your retirement savings and eventual pension payments. Also, depending on the type of account you have, some of the money can be used to pay for various types of insurance (eg life, disability). You need to ensure that you have appropriate insurance coverage – being over-insured is a waste of money that could eat into your pension, being under-insured is inadvisable, too. There are a variety of plans and companies with different options. If you are unclear about what is best for you, consult with an insurance agent or financial planner. Just make sure that the investments, fees and insurance coverage meet your needs and maximize your benefits. The difference can be very significant in the long term.
The rest of the money that doesn’t show up in your bank account is unfortunately not saved in an account for you but rather paid toward various taxes. Bituach Leumi is paid in part by your employer and in part by you, and mas briyut (healthcare) is taken from your salary too. Exact amounts depend on your income but range from 3.55%-7.6% from the employer and 2.5%-12% from the employees (there is different taxation for the self-employed which is beyond the scope of this article). Your monthly payments to bituach leumi ensure that you are covered and will receive payment for situations including maternity leave, miluim, certain disability situations, some unemployment payments, nationalized health insurance and retirement pension.
Mas Hachnasa, income tax, is taken from your salary. The amount varies greatly and depends on many factors such as how recently you made Aliyah, how many dependents you have (these and other factors determine your number of nekudot zikui (points that translate into monthly tax credits), and obviously how much money you make – some people might not pay any, and the highest rate is currently 50%.
It is important to note that tax is paid not only on the salary you receive but on other benefits your employee gives you as well. If you receive a company car, cell phone, meals or various other non-cash benefits, those are taxed and will appear on your tlush.
If you do pay mas hachnasa, you should be sure to save any receipts from tax deductible charities, as you can receive a tax credit for 35% of those contributions. You can receive the refund by either filing a tax return (in Israel, if you are not self-employed or own your company, you do not have to file one at all) or alternatively, you can bring your receipts to a mas hachnasa office and they will give you paperwork to give your employer to receive the tax refund with your next paycheck.
Keren Hishtalmut is a wonderful but optional savings plan which is basically totally tax free (up to certain limits) – you don’t pay Israeli tax when receiving it, on the investment gains or on the withdrawal. It can be withdrawn after six years but can also continue to grow tax-free if you don’t need the money. This is partially deducted from your pay and partly funded by your employer, if they agree to give it. If your employer does not offer it, it is sometimes worth taking advantage of the option even if it must all come out of your salary and will not be funded at all by your employer, as the tax benefits and investment option can be very beneficial.
Although this article doesn’t cover all the elements involved in everyone’s tlush, I hope it helps clarify and show you ways to possibly enhance your long-term savings plans. Discuss your options with your company, or if you feel they aren’t giving you the correct advice, speak to a trusted financial advisor. In general, salaries in Israel are not high, but understanding the different components can help you negotiate a better arrangement, feel better about your salary, and optimize your choices. Behatzlacha!
Yaakov Ehrenkranz is a Financial Advisor at Labinsky Financial. He specializes in financial planning, helping new and veteran olim adjust to the financial reality in Israel, and offering advice to achieve financial stability and success for individuals, families and small businesses. Yaakov can be reached at firstname.lastname@example.org