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Independent deposits to the provident fund for 2023

Independent deposits to the provident fund for 2023

Don’t miss a significant tax benefit for independent deposits to a provident fund for 2023!

**The information and data in this article are for general information only. The provisions of the law on the subject are more complex than detailed in the article, and to receive detailed information regarding your personal situation, you can contact us for individual advice**

Dear customers and friends,

We are approaching the end of the 2023 tax year, a very complex year for many business owners, and this is a good opportunity to remind you to take advantage of a very significant tax benefit by making a proper independent deposit to the provident fund, the pension fund or the managers’ insurance.

Whether you are employed or self-employed, if you currently have free money and you are interested in both benefiting from a tax benefit and saving for retirement, this tax flash is for you.

Act quickly so that the deposits are received before the end of 2023

We will divide the article into three: deposits for the self-employed, deposits for employees and benefit for life insurance.

Deposits for the self-employed

Mandatory pension deposit and benefits exist in depositing to a provident fund independently over time

First, let’s recall that starting in 2017, the state requires the self-employed to make a minimum deposit to a provident fund as part of a mandatory pension deposit.

To read about the amounts required for a minimum deposit, click: here

We recommend not to be satisfied with the minimum deposit and to take full advantage of the tax benefit you deserve for an independent deposit to your pension fund.

Besides the tax benefits, the independent deposits have another great importance: increasing the independent deposits to the provident fund over time will increase your monthly pension and you can ensure financial security after retirement age.

What is the tax benefit and what is the recommended deposit amount?

The deposit is recognized as a tax benefit up to an amount of 16.5%-16% of the annual taxable income (the income after recognized expenses) subject to a maximum annual income ceiling of 225,600 NIS and a maximum annual deposit of 37,244 NIS.

If you have additional income in the tax year (such as income from interest, dividends or uninsured salary) and the self-employed taxable income is lower than the ceiling of NIS 225,600, you can deposit additional amounts into the provident fund and enjoy an increased tax benefit, up to a ceiling of NIS 37,244.

Illustrative example: self-employed with expected annual taxable income of NIS 90,000 and interest income of NIS 10,000.

The maximum amount he can deposit to benefit from the tax benefit is: 100,000*16.5% = NIS 16,500.

Another example: self-employed with an expected annual taxable income of NIS 250,000.

250,000>225,600, therefore the maximum tax benefit he can receive is:

225,600 * 0.165 = NIS 37,224, and for that he must deposit NIS 37,244.

Deduction and credit

The tax benefit is divided into two: a credit-type benefit and a deduction-type benefit.

The credit-type benefit grants a tax credit of 35% of the recognized deposit amount.

A deduction-type benefit functions like a recognized expense and provides a tax benefit according to the depositor’s marginal tax rate.

In general, the deposit is divided into 11% (of the taxable income) as a deduction and 5.5% as a credit. So for a recognized deposit of NIS 37,244

NIS 12,408 will be recognized as a credit and NIS 24,816 will be recognized as a deduction.

The cumulative tax benefit for the deposits can be about 32% of the total deposit, that is, an annual tax benefit of NIS 11,918!

Deposits for employees

When talking about tax benefits in pension savings, the focus is usually on the self-employed, but it is important to remember that employees can also benefit from these tax benefits by making independent deposits to the provident fund.

A benefit for an employee’s deposit is automatically received on the payslip

As of 2017, the minimum contribution rate for employees is 18.5% of the salary, of which at least 6% is on the employee’s account, at least 6.5% on the employer’s account for rewards and at least 6% on the employer’s account for compensation.

In respect of the deposit on the employee’s account, a tax benefit is received in the form of a credit which grants a 35% tax credit on the amount of the deposit up to an annual deposit ceiling of 7,896 NIS.

That is, the maximum tax benefit received by the employee’s deposits made through the pay slip is: NIS 7,896 * 0.35 = NIS 2763.

This benefit is received when the employee’s insured monthly salary is NIS 9,400 or more if the employee’s deposit percentage is 7% or NIS 10,867 or more if the employee’s deposit percentage is 6%.

Open a pension fund as an independent and enjoy additional tax benefits

Employees with uninsured wages, (ie income for which the employer does not deposit to the provident fund), can deposit additional funds independently to the pension fund and enjoy an additional significant tax benefit.

Uninsured wages can exist when you receive bonuses, work overtime, the value of a car, shares, etc., as well as when there is other income that is not from work.

In some workplaces, it is possible to transfer to the employer a confirmation of an independent deposit and enjoy the tax benefit for the deposit in the payslip, but in most cases the tax benefit will be reflected in the submission of the annual tax report.

Independent deposit – additional tax benefit

You can independently deposit 16% of your uninsured income into the provident fund up to an average monthly uninsured income ceiling of 9,400 (annual income of 112,800).

That is, the maximum amount to deposit independently is 112,800*0.16 = 18,048 and a deposit of this amount can result in a tax refund of up to NIS 6,316.8

Illustrative example:

An employee with a monthly salary of 20,000 NIS, of which 15,000 is insured income and 5,000 is the value of a car and bonuses.

The employee can independently deposit 16%*5,000 = NIS 800 each month and receive tax benefits for this deposit.

The annual tax savings will be about NIS 3,300.

Deposits for the self-employed who are also employees

In case the employee has mixed income, i.e. income as an employee and self-employed, the two incomes must be looked at together and the income as self-employed will be considered as uninsured income.

The deposits for this income are subject to an annual deposit ceiling of approximately NIS 17,600 minus the benefit received for employee deposits made through the payslip.

Tax benefit for a deposit for life insurance, self-employed and employees

Life insurance premium payments also qualify for a tax benefit, including life insurance premium payments for a mortgage.

The tax benefit is up to 5% of the uninsured salary, up to an uninsured salary ceiling of NIS 112,800.

That is, the maximum tax benefit is 112,800*0.05 = NIS 5,640.

Which grants a tax refund of NIS 1,974.

What should be done?

If you have not yet opened a pension fund on an independent basis, it is recommended to hurry up and contact one of the companies in the market in order to make a deposit before the end of 2023.

In some cases, the deposits can also be made to the spouse’s pension fund and still enjoy the tax benefits.

In addition to the tax benefit, independent deposits over time will increase the monthly pension you will receive after retirement age and help you ensure financial stability in the future.

After making the deposit, you can contact the employer to receive the tax benefit on your payslip or receive the benefit as part of submitting an annual report

For questions and additional details, you can contact our office at [email protected] or by phone at 02-9992104 extension 656.

**Note: The term provident fund refers to a pension fund, executive insurance and annuity provident fund, but not to an investment provident fund**

** The data in this article refers to the current balances for 2023**

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