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Coming to Israel with a financial plan will help you to decide what community you can afford to live in, how large a home you can rent or buy, and what your standard of living will realistically be.
Let’s take an in-depth look at your salary component and how it fits into your budget in Israel, step-by-step, helping you prioritize, anticipate, and control your future expenditures — instead of allowing your money to control you.
Short-term goals can include defining what you want your cash flow to look like over the first six months or year of your Aliyah. How much of your total savings do you anticipate using during this initial integration period? Alternatively, your goal might focus on cutting a specific expense or saving for an upcoming family event.
Medium-term goals might include buying a home within approximately three years of arriving in Israel. Long-term goals would include saving for education, retirement, and other future events.
Defining goals is the crucial first step — but afterwards you need a plan. You cannot run a family budget, nor plan a successful Aliyah, without a financial plan. Create your plan based on your priorities and goals. Then you can start looking at your budget and figuring out where the money should go.
Write out your goals so that they are clear. While putting them all on paper, or screen, can be difficult it is a very important step. You are then forced to think things through, and by being able to see everything in front of you, you have a better chance of realizing your goals. Don’t procrastinate! Take the time right now (if you haven’t already) to define your goals and start building that personal plan.
The most common mistake people make when constructing a financial plan is to blur the distinction between wants and needs. Do you really need that new gadget/car/trip, or is it something you want to have? If you have enough disposable income, then go ahead. But if you’re struggling to make it through the month on an Israeli salary, ask yourself some hard questions. There’s always a tradeoff; you’re either spending the money now or saving it for something down the road. If you can’t afford something, you simply need to postpone it temporarily or permanently.
Because disposable income in Israel is generally less than in most developed Western countries and prices in Israel are relatively high, distinguishing between wants and needs makes all the difference in “making it.”
The most common employment options include:
Salaried employment
Opening your own business
Outsourcing your services through an employment or manpower agency
Working two or more part-time jobs
Studying full-time and working part time or during vacation times
Opening your own business
Working for your current employer outside of Israel via commuting or internet
Commuting back to your home country (weekly, monthly, or quarterly)
After evaluating various employment prospects, most people decide to seek work as an employee, in one form or another. If this applies to you, it’s critical to understand how the Israeli employment scene works and what standard employment benefits include. Of course, the different language and culture can make job searching a challenge, but understanding the basics will make finding the appropriate job — and negotiating its terms — much easier.
The most common employment method is the standard employer/ employee option. On average, salaries for most employees in Israel are often considerably lower than they are in many Western countries. According to the Central Bureau of Statistics in Israel, the average monthly gross salary in Israel in 2020 was NIS 11,459.
So how do Israelis make it through the month on these apparently low salaries? What’s the big secret? In truth, these low average salaries are misleading, as they do not reflect the total benefits that employees can earn in addition to the standard wage.
First of all, while Israeli wages are lower than many other western countries, Israeli labor law is, historically, very worker-oriented, with significant legal and cultural precedent to protect workers’ rights. Furthermore, there are many other financial benefits that Israeli workers receive.
Let’s try and understand the system. In many countries, wages are discussed using “gross” terminology — meaning that numbers are generally discussed prior to the standard deductions, which include taxes, social insurance payments, and contributions to pension and savings plans. A person earning $100,000 in the United States is not coming home with anything close to that after all these obligations have been paid and contributions have been made to long-term savings plans. Net salaries are considerably less than a person’s official salary (which is really a “gross” salary).
In Israel, salaries are quoted in either “bruto” or “netto,” neither of them being equivalent to the “gross” calculations abroad. Neither bruto nor netto salaries give you the entire picture as to what you’re actually earning and saving in Israel.
Bruto salaries are similar to gross calculations, with some notable exceptions. Outside of Israel, for example, pension contributions are often paid out of gross salaries earned, while in Israel employer pension and severance contributions are paid above your bruto salary. Rather, they are paid by your employer, similar to matching payments in a 401(k) in the United States. Most salaries today in Israel are quoted as bruto and include only the base pay — which in Israel is often linked to the consumer price index (CPI or madad) to help maintain the salary’s purchasing power. It does not include potential bonuses, exceptional salary agreements or additions (very common in the public sector), pension contributions, and numerous potential fringe benefits.
Netto salaries are what the employee actually brings home every month, which is what many employers and employees focus on almost exclusively. This netto salary is obviously incredibly important to the average employee worldwide, but in Israel it’s even more important because most employees never file tax returns. The employer is responsible for remitting all taxes and payments on behalf of the employee. The average employee never needs to file yearly tax returns in Israel. Whatever an employee receives from his employer at the end of the month is final (barring errors which can be corrected easily in subsequent months).
Here are the major benefits that you need to know about prior to negotiating your salary. And of course, remember that you’re in the Middle East, so it is worth trying to negotiate!
The new Israeli pension law came into effect on January 1, 2008, mandating universal pensions for all workers in Israel who have worked at a company for a minimum of six months. Prior to the new law, an estimated 50% of all Israeli workers did not have pension plans and relied on national insurance payments (well below what the average person can survive on) and savings to make it through retirement. The new law’s contribution rates have grown progressively, as seen in the table below. Pension benefits are paid as a percentage of the bruto salary, which does not include any of the additional benefits mentioned above. Both employers and employees make contributions that are remitted on behalf of the employee to the employee’s pension fund.
Prior to 2008, pension contributions were a voluntary agreement or benefit provided by the employer (see “standard plan” in the table below — this standard arrangement continues with many companies today), where pension contributions were generally matched by the employee and employer, amounting to 5–6% of the employee’s bruto wage monthly. Because this benefit and others are dependent on the bruto wage (these benefits are a fixed percentage of the bruto salary), this number is crucial in any wage negotiation. Since 2008, the mandatory contributions for both the employer and employee have been growing yearly.
Effective January 1, 2017, the minimum employer rate increased to 6.5% while the minimum employee rate and the severance rate became 6%. These contributions are made to a retirement fund and these funds are managed by the large insurance companies and investment houses.
In addition to the retirement payments, employers are obligated to pay severance packages, called pitzuim, to employees who are fired/made redundant. Employees receive the equivalent of one month of pay for every year worked. Many companies not only pay this money to the employee when their job is terminated, but often also contribute it directly to the employee’s pension fund during the course of employment. Severance contributions in general (up to a certain limit) can be withdrawn from your pension or severance fund (tax free) in the event that you are made redundant, but many people leave this money in their pension fund to increase their pension.
| Year | Company (retirement) | Company (severance) | Employee (retirement) | Total |
|---|---|---|---|---|
| 2008 | 0.833% | 0.834% | 0.833% | 2.50% |
| 2009 | 1.66% | 1.68% | 1.66% | 5.00% |
| 2010 | 2.50% | 2.50% | 2.50% | 7.50% |
| 2011 | 3.33% | 3.34% | 3.33% | 10.00% |
| 2012 | 4.16% | 4.18% | 4.16% | 12.50% |
| 2013 | 5.00% | 5.00% | 5.00% | 15.00% |
| 2014 | 6.00% | 6.00% | 5.50% | 17.50% |
| 2015 | 6.00% | 6.00% | 5.50% | 17.50% |
| 2016 | 6.25% | 6.00% | 5.75% | 18.00% |
| 2017 | 6.25% | 6.00% | 5.75% | 18.00% |
| 2018 | 6.50% | 6.00% | 6.00% | 18.50% |
| 2019 | 6.50% | 6.00% | 6.00% | 18.50% |
| 2020 | 6.50% | 6.00% | 6.00% | 18.50% |
Under the old pension law, employers were not obligated to pay severance in the event that an employee left voluntarily, only when an employee was fired. The new pension law mandates pensions at lower rates than the former standard (but voluntary) pension and severance package, but they allocate the entire amount to the employee, whether they leave the employer voluntarily or not. These payments thus provide a strong basis for your pension, as since 2017, 18.5% (12.5% for pension and 6% for severance) of your base salary will be saved annually, quite a significant amount, especially if you start saving when you’re young.
When negotiating your contract, you need to know what type of pension benefits your employer is offering so you’ll be able to negotiate effectively. Severance pay contributions of 6% are not refundable to the employer under the new pension law (i.e. the employee almost always gets to keep this severance money even if he leaves voluntarily). However, in the event that a worker is fired, the employer is still obligated to pay one month‘s salary (the equivalent of 8.33% of one’s yearly bruto salary) for each year worked.
Worldwide there are trillions of dollars of unclaimed assets sitting comfortably in the accounts of banks, insurance companies and government agencies due to the inability to locate the owners and their beneficiaries.
In Israel, a comparable situation exists. With employees hopping from company to company, encouraged by insurance agents and companies alike to open up new savings accounts at each stop, the ability the keep track of one’s accounts is increasingly difficult. The problem is compounded for English speakers who don’t always understand the types of policies and their unique characteristics including to whom the money really belongs (in most cases the money is legally theirs and does not belong to the employer). And whereas one fine day the individual might remember that fund, and contact the company, and receive their funds, what if something, G-d forbid, happens to a person before he remembers? His surviving family will have no idea that any such fund existed, and will never benefit from their loved-one’s hard-earned savings.
In Israeli there is an online system (financed by the Treasury) Swiftness – a subsidiary of Ness Technologies – that enables the general population to easily access information regarding all their pension savings accounts across the financial system. All pension funds are obligated to share all account information so that we know exactly where our money is located and empowering us to better manage and control our assets.
In addition to standard payments made to employees in Israel, there is a wide range of fringe benefits, depending on the type of company and the industry in question. Generally speaking, the larger the organization, the more extensive the benefits — even when the base pay is not particularly high. In the public sector, for example, extensive benefits often compensate for low pay levels. Employees of some public companies or agencies — like the Israel Electric Corporation and Mekorot (the water authority) — get the best of both worlds with high salaries and extensive benefits. Here is a sample of some of the most common benefits:
Travel reimbursements — by law, employers must pay for their employees’ most basic transportation to work. This payment is not part of the base pay or bruto salary mentioned earlier, so pensions and other contributions ignore this transportation allowance, thus lowering your pension contributions. However, many companies pay well beyond the minimum payment for transportation and will often provide a leased vehicle to the employee. While this benefit is taxed, it is still a significant benefit for the employee, as all car expenses are paid for by the employer, including repairs, insurance, and gasoline. Employees who don’t take a car from their employer are sometimes reimbursed for usage of their own car, especially if they travel during the day for their employer and not just to and from work.
Phone — cell phones are provided by many companies, and while there is some taxation on this benefit, it can still be a significant saving when compared to owning your own phone.
D’mei havra’ah — vacation subsidy allowance is paid after one has worked at a company for a full year and is generally paid in the summer. Workers are entitled by law to payment for a number of days (beginning with five days for the first year) at a fixed rate (NIS 378 per day for those employed in the private sector, and NIS 429 per day for those employed in the public sector, as per the law amended in June 2016).
Vacation time is defined as a minimum of two weeks of paid vacation for the first number of years of employment. The minimum paid annual leave for a five-day workweek increased to 12 days during the first four years of employment, rising to 20 days after 14 years of employment. However, employers often offer a significantly higher number of vacation days to employees (three to four weeks of vacation for senior employees is common), and this is a negotiable perk.
In addition to vacation days, employees are entitled to nine days of paid holidays, generally corresponding to the Jewish holidays. Some employers give off for chol hamoed (the intermediate days of Sukkot and Pesach), either the entire day or half days, while others require you to use your vacation days to take these days off. Erev chag (days prior to the Jewish holidays like Rosh Hashanah) are sometimes, but not always, included in your vacation allowance. Employers often allow workers to take off paid personal days that are not part of their vacation day allowance.
Sick days, mourning days, overtime pay, night shifts, and many other specific terms are generally defined in your employment contract and can be negotiated beyond the legal norm. If these benefits are significant to you due to the nature of your work, research your rights before negotiating with your employer.
Health insurance — supplemental health insurance or dental insurance is often subsidized by the employer. Group rates negotiated by the company may be available, even when official subsidies are not provided.
Other significant benefits include a clothing allowance and quarterly (or annual) bonuses. If your occupation often structures incentives into contracts, ensure that you are receiving the standard incentives, as bonuses can be very significant (with an extra month of salary not an uncommon rate). Bonuses for reaching milestones or for bringing in new business should be included in your written contract whenever possible to avoid misunderstandings.
When operating an independent small business in Israel, whether you own a store or work independently like many professionals do (i.e., psychologists or tradesmen), there are different options available to structure your income in Israel. Structuring your income refers to the method in which your business is legally structured and through which type of business you choose to generate your income.
Many small businesses in Israel are operated by independent self-employed entrepreneurs. Self-employed individuals earn revenue and pay taxes directly to the Israel Tax Authority. They also pay social insurance and health taxes directly to Bituach Leumi (the National Insurance Agency). These taxes and payments are remitted monthly (or every two months) based on either actual income earned or estimates of earned income. At year end, these self-employed workers file annual tax returns that include all income and expenses during the course of the year, correcting the estimates made when remitting taxes and Bituach Leumi payments during the year.
Self-employed workers are one of the few groups of workers who need to file their own tax returns in Israel. In addition to the annual tax return, self-employed individuals are required to file statements of net worth to the Israel Tax Authority (Mas Hachnasah), usually every four or five years.
In 2017 retirement saving plans became mandatory for the self-employed, so that all freelancers between the ages of 21 – 60 are now forced to save for their retirement. Freelancers who were 55 the day the law came into effect are exempt.
The amounts required by law for 2020 are as follows:
Exemptions apply to:
– anyone aged 55 or above when the law came into effect
– anyone aged 60 or over at the end of the tax year
– anyone aged 21 or under at the end of the tax year
– anyone who opened their VAT file within six months of the end of the tax year
– anyone who opened their VAT file within six months of the end of the tax year
Average monthly income | Minimum legal contribution (%) | Minimum Legal Contribution (NIS) |
0 NIS – 5,275 NIS | 4.45% of the average monthly income | Up to 235 NIS per month (based on 5,275 NIS x 4.45%) |
5,275 NIS – 10,551 NIS | 4.45 % of income up to 5,275 NIS, and 12.55% of income earned above 5,275 NIS | Up to 897 NIS per month (based on 5,275 NIS x 4.45% and 5,275 NIS x 12.55%) |
Above 10,551 NIS | 8.5% of 10,551 NIS | 897 NIS per month |
| Fringe benefits | Standard | Optional extra |
|---|---|---|
| Travel | Basic means of transport | Car expenses, company car |
| Convalescence pay | Payment for at least 5 days in first year | |
| Health insurance | Health and dental insurance are often subsidized by employer | |
| Vacation | 12 days for the first 4 years rising to 20 days after 14 years employment 9 paid holiday days (usually Jewish holidays) | Companies often give extra vacation days |
| Phone | Many companies provide a cell phone for employee’s use | |
| Sick days | 18 sick days per year, but employers by law need to pay 50% of wage for the second and third day sick, and 100% for day four and onwards | Often full wages are paid from day 1 |
| Clothing allowance | Sometimes given as an extra | |
| Bonus / incentives | An extra month’s salary is not uncommon |
Due to the nature of business activity in Israel and the large estimated shadow economy these workers face a high level of business scrutiny.
This high level of scrutiny faced by the self-employed and the bureaucracy involved in running a business can be onerous and in many cases overwhelming, although there have been recent amendments to help reduce this bureaucracy.
Many self-employed workers use the services of local accounting firms to calculate and remit payments for them and to interact with the authorities. The accounting professionals know the ins and outs of the system and can save workers lots of time and money, even after their fees are deducted.
Being self-employed has many advantages. Self-employed workers have the flexibility to declare a wide range of business expenses and, if they work from home, can often include part of their home expenses as business expenses. They have maximum flexibility regarding the types of expenses and income earned. They also enjoy the ability to utilize many of the employee employment benefits described above (although somewhat reduced). Unfortunately during the covid pandemic many self-employed workers were at a disadvantage when it came to benefitting from government stimuli.
However, self-employed US citizens need to continue paying American Social Security payments on their earned income (as the foreign income exemption is for salaried income only). As a result, they will be faced with an additional approximately 15.3% tax on their income. This issue, together with the higher level of scrutiny for the self-employed mentioned above, has led many to consider other employment options.
In Israel, many manpower and outsourcing organizations operate (legally and openly) by “employing” self-employed individuals under their business framework. In this arrangement, a self-employed worker converts into a simple employee hired by the manpower company. His or her income and expenses are channeled through the company, and the company uses the revenue and expenses to pay the person a salary, contribute to various benefits and savings plans, and cover all employer costs.
The major advantage in this arrangement is the worker’s ability to avoid time-consuming and sometimes frustrating contact with government agencies by simply becoming a standard employee. It also eliminates the need for US citizens to pay social security on their earned income. Under this structure, all the costs of employing the worker (including employer pension contributions) are paid for out of the income generated by the employee. This arrangement allows the worker to save larger percentages of his salary (the employee’s and the employer’s contribution equal over 18% of one’s salary) as opposed to the smaller percentage that the self-employed can contribute to tax-deferred retirement savings plans.
However, manpower and outsourcing agencies charge monthly for their services (usually 5–7% of revenue up to a maximum monthly charge). The employee also needs to pay all employer costs (up to a maximum of 22% of one’s salary). In most cases, the net impact of this arrangement is slightly higher costs, higher savings amounts — and much greater anonymity with the tax authorities.
These manpower organizations have been challenged in recent years to prove that they are legitimate organizations and have undergone restructuring exercises to remain legal. However, Bituach Leumi has challenged their legality and many self-employed workers who worked through manpower companies have switched in recent years and have needed to explore other business structuring options, including opening up corporations and working directly as self-employed.
While there are still many manpower operations operating in this field, they are constantly adapting to the changing environment in order to stay relevant and legal. If a manpower organization structure makes sense for you, ensure that you do the proper due diligence on both the individual company and their current legal standing before signing up. They remain an option for many, but you just need to ensure that the setup is structured properly.
| Pros | Self-employed | Manpower organization | Corporation |
|---|---|---|---|
| Ability to declare wider variety of home expenses as business expenses | V | ||
| Outsourcing of day to day administration | V | V | |
| Larger savings in salary and tax payments due to employer/employee role | V | V | |
| Ability to take part of salary as dividend and decrease Bituach Leumi payments | V | ||
| Lower basic cost of operating | V | ||
| No direct contact with government offices | V | ||
| Cons | |||
| Need to ensure that taxes and national insurance are paid | V | V | |
| Need to file annual tax return | V | ||
| Need to file a statement of net worth every 4-5 years | V |
The last structure commonly utilized by the self-employed is a corporate structure. By setting up a corporation, the worker turns into an employee, in addition to being the owner of the corporation. This structure gives the employee more flexibility to take part of his income as a salary and part as a dividend, which might allow him to save considerable taxes. Corporations have also been extensively used to avoid paying higher Bituach Leumi payments on wages as opposed to dividends, which are exempt from Bituach Leumi payments. Corporate structures generally entail higher fees, but can be very worthwhile for higher earning individuals.
These are the most common options available for structuring your self-employed income, each with various advantages and disadvantages. Consult with your accountant to determine the best structure for you.
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