Unlike salaried employers, the pension situation with freelancers is more complicated.
While tax benefits have always been available to freelancers who set aside money for a pension and hishtalmut, until 2017 there was no law that demanded such money be set aside. And since the new law went into effect, there have been contradictory policies about the law and its enforcement. I will therefore try my best to explain exactly what is going on here:
Minimum Deposit into Pension
According to the law, the following are the minimum amounts that a freelancer must deposit into his or her pension:
4.45% of revenue from NIS 0 until his full revenue or half of the average wage, whichever is less.
12.55% from half of the average wage until the full revenue or the average wage, whichever is less.
Let me give an example of how this works:
The current average wage is NIS 10,551. If someone makes NIS 7,500 a month
He deposits 4.45% of half of 10,551. 10,551 / 2 x 4.45% = NIS 234.76
He deposits 12.55% of the difference between his full revenue and half of the average wage. 7,500 – (10,551 / 2) = 2,224.50. NIS 2,224.50 x 12.55% = NIS 279.17
The total minimum monthly deposit would be NIS 513.94
Example # 2
The current average wage is NIS 10,551. If someone makes NIS 20,000 a month
He deposits 4.45% of half of 10,551. (10,551 / 2) x 4.45% = NIS 234.76
He deposits 12.55% of the second half of the minimum wage. (NIS 10,551 / 2) x 12.55% = NIS 662.08
The total minimum monthly deposit would be NIS 897. This is the highest minimum to put into the pension – meaning if you earn a million shekels a month, this is all you need to put into your pension.
Also, if you are a salaried employee and an atzmai (like me) then you only have to deposit the difference between what you deposit as a salaried employee and the amount you have to deposit as an atamzi. So if I deposit NIS 200 a month as a salaried employee, but earn a million shekels a month as an atzmai, I only need to deposit the difference between NIS 897 (mentioned above) and NIS 200 – so only NIS 697.
Those atzmaim who do not put money into their pensions will get a fine of NIS 500 the following December after the fiscal year for NIS 500. This amount is a joke and does little for enforcement – in fact, it could only really hurt those who make very little as atzmaim. For this reason, the government declared that it would only fine those who make above minimum wage as an atzmai. So atzmaim who make less than minimum wage and do not pay into their pensions are in a grey area of the law, where they are in violation but it will not be enforced, kind of like driving 5 KPH over the limit.
Best Case Scenario
Now that we have discussed the minimum, let’s talk about the best case scenario – maximum deposits into your pension
Pension: An atzmai can deposit up to 16.5% of his salary (or up to 20.5 % of twice the average wage, the lesser of the two) into a pension.
Of this money – The first 5.5% deposited you get a 35% tax credit and the next 11% is tax deductible. OK, now in English: Let’s say you make NIS 100,000 a year. If you deposit NIS 16,500 in your pension, you get back 35% of NIS 5,500 = NIS 1,925. Also, the other 11% is tax deductible, so at the end of the year, you’ll pay taxes on NIS 89,000 instead of NIS 100,000.
(note: if you put in too much money by accident, the remaining money is obviously after tax is moved to a keren pensia clalit within the same company).
In addition, a freelancer can give himself a keren hishtalmut, a mutual fund that grows tax free and becomes liquid after six year. A freelancer can set aside up to NIS 18,600 a year of his salary. 4.5% of this is tax deductible and the rest can be deposited from after tax money, but still grows tax free like any other keren hishtalmut.
Changes in the composition of the pension for atzmaim
Unlike salaried workers, there is no pitzuyim, severance, element of the pension, the logic being that you cannot fire yourself. Of course, the business may close and you may need the money, so the law changed to allow for some kind of unemployment from with the pension.
According to current guidelines, one third (or NIS 12,200 x amount of years worked, whatever is less) of the money deposited into a pension by an atzmai can be withdrawn under the following circumstances:
- The atzmai closed his business or ceased the current work
- The atzmai reached pension age and is no longer earing anything that merits depositing into his pension
A few more things to note:
Using the pension money as unemployment is only an option for atzmaim who have deposited into their pensions at least 24 of the past 36 months.
Twice in your lifetime, you can withdraw 3 times the minimum wage even if it is more than one third of your pension.
Although all the rules above apply to atzmaim similar tax deductions are offered to artists, tour guides, teachers etc who are suffering financially due to the economic crisis caused by the coronavirus.