Pension and Severance Pay for Employees — Employer Obligations You Cannot Ignore

Why This Topic Is Critical for Every Employer

If you employ workers — even just one employee — you must set aside money for pension and severance pay on their behalf. This is not something you can "skip over" or postpone. The Tax Authority and Social Insurance scrutinize this meticulously, and penalties for non-compliance can be substantial.

Most business owners we meet in initial consultations are completely unaware of the scope of this obligation. Some think it applies "only" to employees in large companies, or that someone else handles it. In reality, it falls squarely on your shoulders.

In this guide, we will cover everything you need to know: what types of contributions exist, exactly how much to contribute, when, how to report, and where the most common mistakes occur.

What Exactly is a Pension, Severance Fund, and National Insurance

Let's start with basic definitions, because this can be a bit confusing at first.

National Insurance: This is not a pension, but rather a state fund designed to cover issues such as unemployment, illness, disability, and old-age pensions in the future. As an employer, you are required to set aside a percentage of wages for national insurance — this is a legal obligation. The Tax Authority collects this, and the employee does not see this money on their payslip.

Mandatory Pension (Direct Pension): This is money that you set aside for a pension fund of the employee's choice — for example, Maccabi, Menorah, Meitav Dash, or another. The minimum rate is usually around 5% of salary (sometimes more, depending on collective agreements). This money belongs to the employee, and they receive a report from the fund.

Severance Fund (Gamal): This is an additional fund intended to help the employee save for the long term. Usually this is around 7.5% of salary. This money is also deposited in the employee's name, and they receive an annual report here as well.

What is important to remember: all of these funds — national insurance, pension, and severance fund — are legal obligations. You cannot choose "not to set aside," even if the employee agrees. This is the law.

Current Contribution Rates — What You Need to Set Aside in 2026

Rates change every year, usually in January. The following information reflects current practice, but it is advisable to check with the Tax Authority or your office soon to see if there are any changes.

National Insurance: Usually around 3.45% of salary (employer's rate), plus a deduction from the employee's wages (usually 1.1% or more, depending on circumstances). This varies by age groups and salary levels.

Mandatory Pension: Usually no less than 5% of salary. Most employers set aside exactly 5%, but collective agreements or individual contracts may require a higher rate.

Severance Fund (Gamal): Usually 7.5% of salary, but this may also vary in different agreements.

Important Note: These are minimum rates. If you have a collective agreement or agreement with the employee that requires higher rates, you must set aside according to the agreement. In short, always check the contract and specific requirements.

How the Process Works — Step by Step

Now let's go through the practical process. If you are currently in the process of hiring an employee, or you already have employees, here's what you need to do:

1. At the time of hiring: Before the employee starts, check which pension fund they have chosen (or if they haven't chosen yet, help them choose). You need their details — the name of the fund, the employee's account number with the fund, and information for exporting deposits.
2. Every month: When calculating payroll, calculate the deductions based on the monthly salary. This includes national insurance, pension, and severance pay. Deduct the amount from the employee's salary (this appears on the pay slip), and set aside the employer's portion as well.
3. Depositing the funds: You typically have until the end of the month or until the date set according to the agreement with the fund. You transfer the money to the pension fund (usually by bank transfer), and you transfer the national insurance deductions to the tax authority.
4. Reporting: Every month you send a report to the pension fund with the employee's details and the amount deposited. This is usually a digital report through the fund's portal. Additionally, you report to the tax authority through the payroll reporting system.
5. Documentation: Keep copies of all deposits, reports, and confirmations that the fund sends you. This is important for future audits.

This may sound complicated, but in most cases accounting software helps automate much of the process. You still need to be careful and verify that everything is accurate.

Tax Authority Reporting — What Must Be Included in the Payslip

Each month, when you issue a payslip to an employee, you must include clear details about deductions. The payslip must show:

• The amount of National Insurance deducted from the employee's salary
• The amount of pension contributions deposited in their name
• The amount of severance fund contributions deposited in their name
• The amount of contributions the employer made (this does not appear on the employee's payslip, but you must report it)

When you submit the report to the Tax Authority (usually through the "VAT and advance payments report" system or annual report), all this data must be documented accurately. If there is an error — for example, you forgot to make a contribution for one month — it can become a problem.

If you work with payroll management software, it typically handles this automatically. However, if you do it manually, pay close attention to the details.

Common Mistakes We See in Practice

In our work with employers, there are several mistakes that repeat themselves:

• Forgetting to make a contribution for a certain month: A business owner gets busy with urgent matters and simply forgets to contribute to the pension fund in a certain month. When this is discovered later, it needs to be made up, and there may be a fine.
• Contribution at an incorrect rate: For example, the employer thinks the rate is 4% when it is actually 5%, or there is a collective agreement that requires 6% and they were not aware of it.
• Failure to report to the tax authority: The employer contributes to the pension fund, but does not report it correctly to the tax authority. This can lead to an audit.
• Contribution to the wrong fund: The employee chose a certain pension fund, but the employer accidentally contributed to a different fund. This is practical and difficult to correct afterward.
• Failure to update rates: The employer contributed according to an old rate, and when the rate changed, they did not update it. This causes a shortfall in contributions.

The best way to avoid these mistakes is to use reliable software, check the data every month, and stay in contact with your pension fund to ensure everything is aligned.

What Happens If You Don't Contribute — Fines and Risks

This is not something we like to talk about, but it is important that you know: if you do not contribute to pension and severance pay as required, you have a problem.

The tax authority examines the monthly reports of employers, and they have a system that identifies shortfalls. If they find that you did not contribute in a certain month, they can:

• Impose a monetary fine for non-compliance
• Require you to make up the contributions plus interest
• Conduct an in-depth audit of all your reports
• In serious cases, refer the matter to the enforcement authority

Additionally, if an employee files a complaint (for example, if they did not receive a report from the fund), this can lead to an investigation. It is not worth it.

The best way? Just do it right from the start. It is not that complicated, and it saves you a lot of headaches.

When Should You Contact an Accountant?

If you employ workers—even if it is just one employee—it is advisable to have someone arrange this matter. It is not something you should do yourself unless you already have experience.

Ben Or Kook helps employers of all sizes—from self-employed individuals who hired their first employee, to large companies. We handle the calculation of contributions, monthly reporting, documentation, and ensure that everything is in order according to the law.

If you are in the process of hiring an employee, or if you have employees but are not sure everything is arranged correctly—let us talk. First consultation is free of charge, and we will help you understand exactly what you need.