Taxation of employment income - part 1 - Tax at source

Over the next few posts, we will cover many aspects pertaining to employment income - relating to the obligations of both employer and employee, with specific focus on employee rights and taxation.

As discussed previously, a person whose only income is their salary is not required to file a tax return. This is because Israel operates a Pay-As-You-Earn system which obligates the employer to deduct at least the correct amount of tax from the salary of an employee.

As a basic rule, each month's tax is based on the the monthly salary and the various credits that the employee is entitled to for that month. Potentially, that means overpaying in a month in which you got significant overtime pay, bonus etc. The law therefore allows the calculation to be made on a cumulative basis throughout the year if you have worked in the same place since January, or this is your first employment of the year.

In order to ensure that you get the correct amount of credit points, form 101 must be filled in (link to the form); immediately for a new employment and on 1st January each year for ongoing employment. On a practical level, it should be filled out in time for your employer to process your first salary of the year.

The form is split into two pages. The second page is for claiming all of the relevant credits. Most do not require any paperwork or confirmation from the tax office, but read the notes carefully!

The first page contains some basic information about both employer and employee. 

Of particular importance is section ה which gives details about the employment. Specifically, if you have more than one place of employment (and for these purposes, a pension is considered another employment), you will, most likely need to get a "Teum Mas" - the subject of the next post.

It should be noted that only credits enumerated on the 101 and those directly related to payroll ( e.g. Pension, life insurance etc. if applicable) can be given by the employer. Anything else will need to be claimed via a tax return (the prime example is donations - see here for more).

Employers are also required to deduct Bituach Leumi at source. The lower rates of Bituach Leumi will be given in the main employment; all other employments will have the full rate deducted unless a "Teum Bituach Leumi" is done - but that's for another time.

"Negative" Income Tax - מס הכנסה שלילי

A number of years ago, the government introduced a scheme designed to help workers earning very little. This grant, based on average monthly earnings in the previous tax year (hence the term "income tax"), was initially available only to those living in certain parts of the country. Grants for 2012 are the first to be available countrywide.

 

Who is eligible?

You must meet the following criteria:
 

1. Be aged 55+ or aged between 23 and 54 and have at least one child.

2. You, together with your spouse, own no more than a 50% stake in any land or property (worldwide) that is not your residence.

3. Your average monthly earnings in 2012 (salary or freelancer, based on actual months worked) was between approx. NIS 2,000 and NIS 6,000.

It should be stressed that you are not eligible for months on which you received salary from a family member, or a company controlled by a family member.

Furthermore, maternity pay received from Bituach Leumi is treated as earnings for these purposes.

4. If you were required to file a tax return for 2012, you did so on time.

5. The claim must be made by 30th September 2013, so you need to move fast!

6. Any employer filed their employer-summary form on time (form 126). If they did not, you will be asked to provide the authorities with form 106 in order for them to fully process your claim.

 

How much is the grant?

The grant, per month of eligibility, is based on your average monthly earnings and can reach as high as NIS 705. The full table is as follows:

	Monthly grant (NIS)
Average monthly income (NIS)	- woman (1 or 2 children) - single father responsible for 1 or 2 children	- married father (1 or 2 children) - aged 55+ without children	- woman (3+ children) - single father responsible for 3+ children	- married father (3+ children)
0-2,040	0	0	0	0
2,041	120	80	180	120
2,500	231	154	342	228
3,000	351	234	519	346
3,540-4,730	480	320	705	470
5,000	387	258	610	407
5,500	214	143	433	289
6,034	30	20	N/A	N/A
6,035+	0	0	N/A	N/A
6,645	N/A	N/A	30	20
6,645+	N/A	N/A	0	0

The amounts here are based on the 1st June 2012 figures, and should have increased with inflation on 1st June 2013 - I have yet to see the revised figures.
 

In certain circumstances, the amount due to you will be reduced. This is the case if you are in receipt of one (or more) of the following:

1. Pension income, excluding disability or survivor pensions.

2. Bituach Leumi grant for work or other accident.

Similarly, your spouse's income could reduce your grant.

A simulator (Hebrew only) has been provided by the tax authorities here. It's worth having a look at if you think your claim is borderline.

 

How to make the claim

The claim is made at a post office branch (and only there), and must be made in person. Be careful though: not all post offices are officially branches - check the postal service website before setting off.

You need to take with you your ID card (Teudat Zehut) and a cheque (of formal notification of account details from the bank).

The clerk will hand you a form on which you state:

• Number of employers in 2012 for both you and your spouse.
• Whether you we're self employed in 2012
• Postal address
• Bank details

You will get to keep a portion of the form, which will have details regarding how to monitor your claim. You can monitor your claim online here (Hebrew only).


How you get paid

If you are an employee only, you will receive your grant in two equal payments directly into your bank account, to be paid on 15th January 2014 and 15th April 2014.

If you are (also) self-employed, the grant is offset against your 2012 tax liability. If you have excess grant, it will be offset against the next three year's tax liabilities (i.e. 2013, 2014 & 2015). If, after that, there is still some grant left over, 75% of the remainder will be paid directly into your bank account on 15th July 2017.

Tax relief on donations

"ותשובה ותפילה וצדקה מעבירים את רוע הגזרה"
(Mussaf, Yamin Noraim)

It is no surprise that, given the time of year, charities in Israel are making a concerted effort to raise funds.

As an added incentive to donate, the tax law gives a credit against the tax bill for donations made during the year.

There are a number of conditions that must be met though:

(1) The charity must be recognised by the tax authorities for donation purposes under section 46 of the tax law. You can check whether any particular organisation is indeed registered here (you will need either the formal name of the charity, or their 9-digit ID number which starts 58xx).
(2) The donation must be proved by way of an original receipt, which needs to state that the monies were indeed a donation (and not, for example, membership or the cost of a dinner). The receipt should also state that the organisation is recognised under section 46.
(3) Over the course of the year, at least NIS 180 is donated (in total).


The credit given is 35% of the amount donated. For example, if NIS 1,000 is donated over the course of the tax year, NIS 350 is knocked off the tax bill.


Whilst it is generally not relevant to most people, there is an upper limit to the amount of donation that you can get credit for. This is the lower of the following:
(1) NIS 9,130,000 worth of donations.
(2) Donations exceeding 30% of the taxpayer's annual taxable income.

Excess donations from one year can be carried forward to be used in the next three tax years.


For most people, the only way to claim these credits will be by filing a tax return and including the donations therein. However, a scheme was introduced last year whereby the largest employers can grant their employees the credit provided that certain conditions are met. Best to ask your HR/salary department if they can do this for you.