Salary deductions: the journey from gross to net
The salary stated in your contract is not the amount that actually reaches your account. Taxes, National Insurance, pension contributions and other payments are deducted on the way from gross to net. This page explains how the different deductions are calculated, the difference between taxes and money saved for you, and how to make sure the net pay and contributions on your payslip were calculated correctly.
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If gross pay is the "promise," net pay is the "reality." The path between them passes through a series of deductions. Some go to the state treasury as taxes, while others are amounts that you and your employer set aside for your financial future.
Income tax: your silent partner
Income tax is usually the most significant deduction. In Israel, tax is calculated in brackets: the more you earn, the higher the tax rate on the upper portions of your salary.
Tax brackets for earned income
Tax brackets for earned income
| Annual income | Monthly income (annual income divided by 12, for illustration only) | Tax rate |
|---|---|---|
| Up to ₪84,120 | Up to ₪7,010 | 10% |
| ₪84,121–₪120,720 | ₪7,011–₪10,060 | 14% |
| ₪120,721–₪228,000 | ₪10,061–₪19,000 | 20% |
| ₪228,001–₪301,200 | ₪19,001–₪25,100 | 31% |
| ₪301,201–₪560,280 | ₪25,101–₪46,690 | 35% |
| ₪560,281–₪721,560 | ₪46,691–₪60,130 | 47% |
| ₪721,561 and above | ₪60,131 and above | 50% |
There are also tax brackets for income that is not earned from work, such as dividends from stocks or rent from an investment property. The tax differs according to income and age. More information is available on the Kol Zchut (כל זכות) website.
What is a marginal tax rate, and why does it matter?
Your marginal tax rate is the highest tax rate you pay on the last portion of your income.
For example, if your marginal tax rate is 31%, every additional shekel you earn is taxed at that rate.
This rate usually appears on your payslip under personal details, and it is important for understanding how salary increases or bonuses affect your net pay.
Example
If you receive a raise or bonus of ₪1,000, your marginal tax rate determines how much of it actually remains in your pocket. If your marginal rate is 35%, only ₪650 of every additional ₪1,000 remains. In practice, less remains because you also pay National InsuranceA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. and health tax on the addition.
National Insurance and health tax
These deductions are intended to provide a social and medical safety net:
- National Insurance, Bituach Leumi (ביטוח לאומי): Funds benefits such as unemployment, maternity, reserve-duty, disability and old-age payments. The payment is divided between the employee and employer.
- Health tax: Transferred to the health funds to finance the public healthcare basket. Unlike National Insurance, this tax is paid entirely by the employee.
The payment rate varies according to salary, age and employment status. More information about the amount is available on the National Insurance website.
Social contributions: pension, severance and Keren Hishtalmut
This is one of the most important parts of the payslip, but unlike taxes, this money remains yours.
Social contributions
| Contribution type | Who pays? | Where does it go? |
|---|---|---|
| PensionA monthly payment made to a person after retirement from work in order to help maintain their standard of living. (employee share) | Employee (6%–7%) | Savings for a monthly pensionThe monthly amount paid to the saver in retirement, calculated by dividing the amount accumulated by a "conversion factor." at retirement age. |
| Pension (employer share) | Employer (6.5%–7.5%) | An employer addition to your pension savingsA general term for long-term savings products (pension fund, managers’ insurance, or provident fund) intended for retirement.. |
| Severance pay | Employer only (6%–8.33%) | Money accumulated in case employment ends, deposited into the pension fundA savings vehicle based on mutual risk sharing that includes insurance coverage in cases of disability or death.. |
| Keren Hishtalmut (קרן השתלמות)A medium-term savings product (six years) that benefits from a tax exemption on investment gains up to the applicable contribution limit. | Employee and employer, usually 2.5% employee and 7.5% employer | A significant employment benefit; tax-exempt savings up to a certain salary ceiling after six years. |
In addition to the social contributions that employees and employers are required to make by law, some employers also contribute to a Keren Hishtalmut. This is a significant employee benefit, but it is not legally mandatory.
Keren Hishtalmut
| Contribution type | Who pays? | Where does it go? |
|---|---|---|
| Keren Hishtalmut | Employee and employer, usually 2.5% employee and 7.5% employer | A significant employment benefit; tax-exempt savings up to a certain salary ceiling after six years. |
Voluntary deductions
These deductions are not required by law. They are made with your consent or as a result of collective agreements:
- Membership or service fees: Payment to the workers' committee or the Histadrut (הסתדרות).
- Loan repayments: If you took a loan from your employer.
- Benefit purchases: Payment for dental insurance, a subsidized company vacation or options.
The bottom line: net pay
This is the final amount that "lands" in your bank account.
As salary rises, the tax rate also rises, so the increase in net pay will be smaller than the increase in gross pay.
Frequently asked questions
Why was so much income tax deducted from my salary this month?
Income tax is calculated on an annual basis. If you received a one-time bonus or salary adjustments, the system "assumes" that you will earn that amount every month and raises the bracket. By the end of the year, or through tax coordination or a tax refund, it balances out.
In some cases, is it better to ask my employer not to give me a bonus?
It is almost always better to receive the bonus. Israel's tax system is progressive, so the higher tax applies only to the bonus itself and not to your entire salary. Your net income therefore always increases in the final calculation. Consider waiving or postponing it only in rare cases where the additional income could cancel eligibility for a government benefit, such as income support or daycare subsidies, that depends on strict income tests.
In summary
The transition from gross to net can be frustrating, but it is important to remember that a substantial portion of the money that "disappears," namely pension and severance contributions, is actually your future. Understanding the deductions helps you make sure that too much tax is not being withheld and that every shekel due to your savings is indeed deposited there.