Attention: As of 2017 Self-employed business owners must make independent contributions to their pension fund.
** The information and advice in this notice are for general discussion purposes only. The provisions of the law on these subjects are more complex than those detailed in this article. For more information regarding your personal situation, you should contact us for an individual consultation. **
Dear Clients and Friends,
As we are now approaching the year end of 2020, it is a good opportunity to remind you that if you are self-employed you are obligated by law to contribute into a pension plan.
Failure to make such deposits may result in a fine of 500 NIS.
(As of this writing, if your income is below the minimum wage and you did not make any deposits, there will be no penalty.)
Who is required to make self-employed pension contributions?
- Self-employed individuals between ages 21-60.
- Self-employed individuals in which 6 months have passed since their business was registered with the VAT office.
Contribution amounts:
How much must one contribute to their pension plan?
In order to determine the amount that one is required to contribute there is a two layered calculation which uses half of the national average salary (5,275 NIS for 2020) as a benchmark.
- For taxable income below or equal to the benchmark amount one must contribute 4.45% of that income.
- For income that is above the benchmark amount and below the national average salary (10,551 NIS), one must contribute 12.55% of that income up to the actual amount of income or the national average salary, whichever is lower.
In determining taxable income, all expenses that are allowed for tax purposes are deducted.
Example:
Albert, a self employed individual, is earning 6,500 NIS per month. The amount that Albert is required to contribute to his pension is calculated as follows:
Step 1 – 5,275*4.45% = 237 NIS
Step 2 – (6,500-5,275)*12.55% = 154 NIS
In total, the required contribution amount is 237+154 = 391 NIS per month.
Self-employed individuals, that are not employees, with an average monthly income above the national average salary (10,551 NIS)
A self-employed person who does not work at the same time as an employee, and has earnings above the national average salary (10,551 NIS as of 2020) must contribute 897 NIS per month (10,762 NIS for the entire year).
Self-employed individuals who are also employees
A self-employed individual who is also working as an employee, automatically has a pension contribution made both by the employer and employee in his monthly pay slip. If the amount that was contributed as an employee exceeds the amount that he is required to make as a self-employed person, then he is not required to make any contributions as a self-employed person.
Therefore, if the pension contribution from a self-employed person who is also an employee exceeded 10,762 NIS for the year via salary slips, there is no requirement to make additional contributions.
What you need to do
Contact one of the insurance companies / pension funds in Israel and ask to open your pension account as a self-employed. Be sure to make a deposit to your account by the end of 2020.
In order for you to be able to take the utmost advantage of the tax benefits granted in this area, we recommend you to contribute a higher amount than just the minimum that is required by law.
For more information about the tax benefits regarding contributions to provident funds please see our article here.
For questions and other information, please contact Zecharia Deutsch at our office at [email protected] or call 02-9992104.
* Note: The term provident fund mentioned in this memo refers to a pension fund, executive insurance and an annuity provident fund and not to an investment provident fund. *
** The information in this article refers to rates for year 2020. **
Very truly yours,
Deutsch & Company