Salary Deductions: The Journey from Gross to Net
The salary stated in your contract is not the amount that actually reaches your account, because taxes, National Insurance, Pension contributions, and other payments are deducted on the way from gross to net pay. 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 (taxes), while others are funds that you and your employer contribute toward your financial future.
Income tax: your silent partner
Income tax is generally the most significant deduction. In Israel, tax is calculated using a bracket system: the more you earn, the higher the tax rate on the higher portions of your salary.
Tax brackets for earned income
| Annual income | Monthly income (annual income divided by 12, for illustration only) | Tax rate |
|---|---|---|
| Up to 84,120 ILS | Up to 7,010 ILS | 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 ILS and above | 60,131 ILS and above | 50% |
There are also tax brackets for unearned income, such as tax on stock dividends or rent from an investment apartment. The tax varies by income and age. Additional details can be found on the Kol Zchut website.
What is a "marginal tax rate," and why is it important?
The 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%, it means every additional shekel you earn will be taxed at that rate.
This percentage usually appears on the payslip under personal details, and it is important for understanding the impact of salary increases or bonuses on your net pay.
Example
If you receive a raise or bonus of 1,000 ILS, the marginal tax rate will determine how much of it actually remains in your pocket. If your marginal tax rate is 35%, out of every additional thousand ILS, only 650 ILS will remain (in practice, less will remain because you will 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 you with a social and medical "safety net":
- National Insurance: Used to fund benefits (unemployment, maternity, reserve duty, disability, and old-age benefits). The payment is split between the employee and employer.
- Health tax: Transferred to health funds to finance the public health basket. Unlike National Insurance, this tax is paid entirely by the employee.
The payment rate varies according to salary level, age, and employment status. Additional details on payment rates can be found on the National Insurance website.
Social contributions: Pension, Pitzuyim (פיצויים), and Keren Hishtalmut (קרן השתלמות)
This is one of the most important parts of the payslip—but unlike taxes, this is money that 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 portion) | 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 portion) | Employer (6.5%–7.5%) | The employer's contribution 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%) | Funds accumulated if 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, 7.5% employer) | A significant employment benefit; tax-exempt savings (up to a certain salary ceiling) after 6 years. |
Beyond the social contributions that employees and employers are legally required to make, some employers also contribute to a Keren Hishtalmut (קרן השתלמות)—a significant employee benefit that is not legally mandatory.
Keren Hishtalmut (קרן השתלמות)
| Contribution type | Who pays? | Where does it go? |
|---|---|---|
| Keren Hishtalmut (קרן השתלמות) | Employee and employer (usually 2.5% employee, 7.5% employer) | A significant employment benefit; tax-exempt savings (up to a certain salary ceiling) after 6 years. |
Voluntary deductions
Deductions that are not legally required, but are made with your consent or as a result of collective agreements:
- Membership/service fees: Payment to the workers' committee or labor federation.
- Loan repayments: If you took out a loan from the employer.
- Purchase of benefits: Payment for dental insurance, a subsidized company vacation, or options.
The bottom line: net payment
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 me this month?
Income tax is calculated annually. If you received a one-time bonus or salary adjustment, the system “assumes” you will earn that amount every month and raises your tax bracket. At year-end (or through tax coordination or a tax refund), everything is balanced out.
Is it better to ask my employer not to give me a bonus in certain cases?
Almost always, it is better to receive the bonus. Israel’s tax system is progressive, so the higher tax applies only to the bonus itself, not to your entire salary—meaning your net pay will always increase overall. Consider waiving or deferring it only in rare cases where the additional income could eliminate eligibility for a government benefit (such as income support or daycare subsidies) that depends on strict income tests.
In summary,
The move from gross to net pay can be frustrating, but it is important to remember that a significant portion of the money that “disappears” (Pension and Pitzuyim (פיצויים)) is actually your future. Understanding deductions will help you ensure that you are not paying too much tax and that every shekel intended for your savings is indeed deposited there.