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24 October 2013

Taxation of employment income - part 5 - pension contributions and severance pay

In the previous post, we mentioned that a portion of employer contributions towards an employee's pension scheme is not treated as a taxable benefit. In this post I will set out, in short, some of the laws regarding pension and severance pay.

It is important to start this post by discussing the concept of "base salary - שכר יסוד." As implied, this is the gross salary that you earn each month before any additions. In some professions, this can represent a relatively small part of the salary; the main salary is then bolstered by commissions, overtime pay etc.

Since 2008, the law has required both employers and employees to make contributions towards a pension fund for the employee, based in a percentage of the monthly base salary. There are some further rules regarding the initial eligibility criteria, but most employees will meet these within a few months of starting their employment.

Within the pension fund is an element for pitzuyim - פיצויים, i.e. severance pay. Upon the termination of an employment by the employer (and in some cases, by the employee as well), the employer must compensate the employee with severance pay. This is calculated as one month's salary for each year of employment, calculated on a linear basis. The salary for this calculation is the final base salary that the employee was receiving. In general terms, pitzuyim are only required to be paid once the employment has lasted a year.

On top of the pension payment each month, the employer is required to put aside monies into the pension fund on account of the pitzuyim. As and when required, the amounts accrued in the fund can be offset against the employer's eventual liability. That being said, there is a provision in the law whereby - with the agreement of both parties - the employer contributes the full amount to pitzuyim every month (i.e. 8.33%) and the employee only gets what it is the fund when the employment is terminated. This is known as "Section 14" and will be written into the employment contract. In many cases, the amounts accrued in the fund are yours, even if you resign.

The minimum contributions, as a percentage of basic salary, are as follows:

 
Pension
Pitzuyim
Year
Employee
Employer
Employer
2013
5%
5%
5%
2014 and beyond
5.5%
6%
6%


The employer contribution towards pitzuyim is not considered a taxable benefit, as there are significant tax breaks when receiving pitzuyim. But that's for another post.

16 October 2013

Taxation of employment income - part 4 - employee benefits

In the previous post, we discussed that employee benefits are subject to taxation. This post will look at some of the more common payments and benefits from employees, and how they are dealt with for tax purposes.


Travel allowances

The law requires that employers pay their employees reasonable travel costs from their home to and from work. Typically, this is the cost of the monthly bus-pass (חופשי חודשי). However, there is a cap which the employer is required to pay, currently NIS 25.20 per (work) day. These are of course minimums, and the employer can pay more. This is an actual payment, and is subject to tax and Bituach Leumi as with any other part of the salary.

In the event of reimbursement of car expenses, based on kilometres driven, the reimbursement is based on the actual cost of gas, insurances, wear & tear etc. as determined by the Statistical Society. This is reimbursed net to the employee, so there should be a grossing up on this line of the tlush.


Convalescence (דמי הבראה)

This is an historical relic of the period when the Histadrut (general trade union) was very active and strong in Israel. Nowadays, havra'a is simply an extra line in the tlush. Typically, it is paid once per year, normally in the June or July tlush, although some employers split the payment over longer periods, even if split into 12 equal payments over the year.

The amount you are eligible to depends of (a) the number of years that you have worked for the employer and (b) the sector in which the employer operates - private, public or unionised.

The payment is taxed as per any other element of the salary.


Car benefit

If the employer gives the employee the use of a car (expenses borne by the employer), the employee is getting the benefit of not having to purchase/lease a car of their own, and saves on the monthly ongoing costs.

The benefit ascribed in the tax law is intended to reflect these savings. The actual calculation is extermely complicated and is based on either the cost of the vehicle or the "group" of the vehicle, depending on when the vehicle hit the road. The benefit is lower for "greener" vehicles. This value is added to the taxable income for income tax and Bituach Leumi purposes.


Cellphone

Similarly, if the employer gives the employee a cellphone to use for work purposes, it is assumed that a portion of the calls will be for private use. As such, a fixed monthly benefit of NIS 105 (for 2013) is taxed.


Holiday gifts

Typically, most employers give their employee gifts before Rosh Hashana and Pesach. These gifts are subject to tax - based on the value of the gift. Some employers will gross-up the value of the gift, so that the employee doesn't lose out by way of extra taxes.


Pension contributions

Since 2008, employers have had to make contributions to a pension scheme on behalf of their employees. [There is also the obligation on the employee to contribute to the scheme, by way of deduction from the salary]. Strictly speaking, the contributions made by the employer should be subject to tax. However, the government wishes to encourage people to save, and so contributions made by the employer are not taxed as a benefit up to a limit. The limit is in the region of NIS 1,600 per month.


Keren Hishtalmut contributions

The Keren Hishtalmut, or study fund, is the government-backed tax-beneficial savings scheme. Employers are not required to offer this to employees, but many do as a perk of the job. For an employee, the tax breaks are two-fold. Firstly, the contributions made by the employer - up to a limit of approximately NIS 1,200 per month - are not considered a taxable benefit. Secondly, the entire fund can be withdrawn tax free (including employer contributions and profits made by the insurance company) once the minimum waiting period was ended (usually six years).


There are of course plently of other examples, and the basic rule is that the value of the benefit provided is added to the taxable salary. For specific advise, please feel free to contact me.

11 October 2013

Taxation of employment income - part 3 - the tlush and 106

Most people look forward to receiving their monthly payslip, known as a תלוש משכורת or just tlush.

The Israeli tlush is a highly complicated piece of paper containing a huge amount of information. Below I will set out some of the information that you should expect to see, and what it means to you.

A good translation of a typical tlush can be found here.

The main section of the tlush sets out the various components of your gross salary. This will include - amongst other things - basic salary, bonuses, travel and/or car allowance, convalescence (דמי הבראה), overtime pay etc. All of these will be actual payments.
 
There could also appear taxable benefits that the employer has provided to the employee. No extra money is actually paid, but it adds to the taxable salary. Common examples include a company cellphone or car. The consequence of course is that more taxes are paid, and less comes home.
 
Some people may have agreed to some elements being paid net, i.e. They get a certain amount of take-home pay after deductions and taxes. The extra amount added to the salary in order to get to the correct "net" will be shown as a גילום or "gross-up."
 
The next section will deal with deductions from the salary. These fall into three broad categories:

1. Taxes - income tax and Bituach Leumi (including health tax element).
2. Funds - generally pension and Keren Hishtalmut (study) funds, where appropriate. Some tlushim will also show you how much the employer is putting aside.
3. Sundry - this could be anything agreed with the employee e.g. professional insurance, union fees, loan repayments etc.
 
There should be a summary showing the gross payments, various deductions and net salary to be paid for the month. Additionally, the number of credit points being awarded to you should be shown, as well as your marginal rate of tax (as per the tax tables or a Teum Mas) - i.e. the top rate at which income tax is being calculated.
 
The tlush should also tell you the cumulative gross earnings, taxes and fund deductions since the start of the tax year.
 
Finally, the tlush should show you details regarding your entitlement to vacation and sick pay. Typically, this will show how much your remaining entitlement was at the start of the month, the amount accruing to you for the month, how much you used during the month, and the final balance at the end of the month.

The employer is also required to give each employee an annual form (known as Form 106) summarising their salary throughout the previous tax year. This should of course agree to the December tlush (or final tlush received from an employment) cumulative. By law, the employer should provide the form 106 by 31 March following the year. Practically, you'll need to ask for it.
 
The 106 sets out the various amounts required for the tax return, and provides the tax-return codes that each number relates to. It is important to file the 106 with your tax return, and not the December tlush.

4 October 2013

Taxation of employment income - part 2 - The Teum Mas

At the end of the last post, I made mention of the importance of section ה on form 101.

This section tells the employer whether you have another employment. If so, you need to indicate if this particular employment is your main job.

If it is, the employer will tax the salary as if it is the only employment, i.e. the regular tax rates and credits are all given.

However, for any other employment, the employer is required to deduct the highest rate of tax on the entire salary, currently 48% or 50%. However, as this is likely to be way over the top, the tax authority can instruct the employer to deduct a lower rate of tax. This instruction is known as the Teum Mas. Typically, the Teum Mas will say that (a) the main employer should tax regularly, giving full credits, and (b) other employers should deduct x% at source on income up to a certain level (cumulative for the year), and at a higher percentage on anything above that level.

Please note that a Teum Mas is not required if you have chosen the employment as the main employment, even if you indicated that you have another employment. A lot of employers will still ask for one, but you are not required to do so by law.

In very simple cases, a Teum Mas can be done online - here. You will need to have the nine-digit mispar nicuyim (will start with the digit 9) of each employer - this should appear on your tlush. For further identification, the site requires you to provide either your driving license or passport number. Once completed, the formal Teum is set to your home address.

In order to speed things up, or in not-so-simple cases, you will need to go to your local tax office in order to get the Teum. The form that you will need can be found here, and the second page looks very similar to the second page of the 101. Read the instructions carefully - there may be documents that you will be required to provide. You will also need to take some payslips with you to prove the  level of income.

It is important to understand that the Teum Mas is calculated in order that at least the correct amount of tax is deducted. But it is still possible that you will have too much deducted from your salaries. The only way to get this back is via a tax return, and for that you will need form 106, the subject of the next post.