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.