Mandatory Deductions on Your Payslip — What is Actually Deducted from Your Salary?

Why Should You Understand Mandatory Deductions on Your Payslip?

Most employees in Israel don't really know what is deducted from their salary. You receive a payslip, see a number lower than your gross salary, and often it's not clear exactly why. This is exactly what we see in meetings with clients — a question that comes up all the time: "Why is my salary so much lower because of my tax?"

The point is that mandatory deductions are not something you choose — they are a legal obligation. An employer who fails to deduct them on time may face serious problems with the tax authorities and national insurance. On the other hand, if you are an employee and think too much is being deducted from you, you should know how to check that.

In short, understanding mandatory deductions is not just something technical — it's something that can save you headaches and also ensure that you pay exactly what you should, no more and no less.

What Are Mandatory Deductions and Who Does It Apply To?

Mandatory deductions are amounts that an employer is required to deduct from an employee's salary and transfer to government or pension bodies. These are not optional — they are the law. They are divided into several categories:

• Income Tax: tax withheld at source that goes to the Tax Authority
• National Insurance: a contribution to national insurance, which covers things like unemployment, illness, and child allowances
• Mandatory Pension: a deposit to a pension fund, usually with a company of the employee's choice
• Training Fund: savings intended for defined purposes such as home purchase or education

Who is affected by this? Essentially, every salaried employee in Israel. If you work on a salary, these deductions are already subtracted from your pay slip. If you are an employer, you are responsible for ensuring that these deductions are properly transferred to the relevant authorities.

Self-employed individuals and companies? They do not pay mandatory deductions exactly like salaried employees. They pay tax installments, VAT (if applicable), and national insurance in different ways. However, if a self-employed individual or company employs workers, they must deduct mandatory deductions from their employees' salaries.

How Mandatory Deductions Work — Step by Step

The process is actually simple in principle, but there are several steps and calculations that are important to understand:

1. The employer determines the gross salary. This is your basic amount before any deductions.
2. The employer calculates the income tax deduction. This is based on tax tables that the tax authority updates every year. The tables depend on your income, marital status, children, and special benefits (such as new immigrants or work allowances).
3. The employer calculates National Insurance deductions. These are calculated as a percentage of the salary (usually around 3.45% for employees, but this varies). National Insurance also has an annual cap.
4. The employer calculates contributions to pension and study fund. Usually this is a percentage of the salary (for pension typically 5–8.33% depending on the fund type).
5. The employer deducts all these amounts from the gross salary. What remains is the net salary — the amount you actually receive in your bank account.
6. The employer transfers the deductions to the authorities. Income tax goes to the tax authority, National Insurance goes to the National Insurance Institute, and pension and study fund contributions go to the pension bodies.

One point that is not always clear: the employer does not only pay your deductions — he also pays an "employer contribution" of his own, which is added to your deductions. This is an additional amount that the employer pays to National Insurance and pension, in addition to what he deducts from you. This does not directly affect your payslip, but it does affect how much the employer pays in total.

What You Need to Know About Taxes and Deduction Reporting

When discussing mandatory deductions, there are two perspectives: the employee's perspective and the employer's perspective. Each is important in its own way.

From the employee's side: If you are an employee, you do not need to worry about deductions — your employer is responsible for them. However, at the end of the year, when you file an annual report (or when the tax authorities send you a notice), you may discover that more or less was deducted than necessary. If too much was deducted, you are entitled to a tax refund. If too little was deducted, you may owe taxes. This depends on your benefits, additional income (if any), and other factors.

From the employer's side: This is more complex. An employer must deduct mandatory deductions correctly, transfer them to the authorities on time, and report everything in monthly and periodic reports. If an employer does not do this properly, they may face penalties, interest, and even legal issues with the tax authorities and national insurance.

Most employers use accounting software that automatically calculates deductions. However, every year there are changes in tax tables, national insurance rates, and benefits — and you need to ensure that the software is updated.

One more important thing: mandatory deductions are only part of the picture. If an employee has professional expenses (self-employed who also works as an employee), or income from other sources, or is entitled to special tax benefits, then the annual report may be more complex. This is a good time to consult with a certified public accountant who will ensure everything is calculated correctly.

Common Mistakes in Mandatory Deductions and How to Avoid Them

In the years we have worked with clients, we see the same recurring mistakes. Here are the most common mistakes:

• Failure to update tax tables: Employers who do not update tax tables at the beginning of the year, or when there is a change in legislation. This causes incorrect deductions — sometimes too much, sometimes too little. The solution? Check that your software is up to date, and check with the tax authority if there are any changes.
• Forgetting to deduct National Insurance or pension: There are employers who do not deduct these deductions at all, or only deduct for certain employees. This is a serious problem because an employee will not be covered by National Insurance and will have no pension savings. The tax authority and National Insurance will catch this in reporting.
• Incorrect calculation of caps: National Insurance and income tax have annual caps. If an employee earns above a certain amount, the deductions change. Employers sometimes forget to calculate this correctly, especially when there are employees earning high salaries.
• Double deductions: This often happens to employees who work in two places. If both employers deduct income tax without knowing about the income from the other place, you may end up overpaying. The solution? Report to both employers about all your income.
• Failure to report tax benefits: If you are entitled to benefits (new immigrant, work discounts, children), and your employer does not deduct them, you will pay more tax. In the annual report you will be able to claim a refund, but it is easier if it is calculated correctly from the start.
• Failure to keep records: Employers who do not keep records of deductions made, or who do not send reports to authorities on time. This can lead to audits, fines and interest.

When Should You Consult an Accountant?

If you are an employer with employees, it is usually advisable to receive professional guidance. However, even as an employee, there are situations where it is worth consulting:

If you are an employee: Contact an accountant if you have income from other sources (self-employment, rental income), if you believe tax was deducted in error, or if you are entitled to benefits that are not deducted from your payslip (new immigrant, work discounts). Even if you work in two places, it is advisable to ensure that deductions are properly apportioned.

If you are an employer: It is almost always advisable. An employer must ensure that deductions are calculated correctly, that they are transferred to the authorities on time, and that reports are filed as required. If you are a company or licensed self-employed, it is even more important as there are additional reporting requirements.

In short, if you have any doubts, or if your situation is somewhat complex (income from multiple sources, special benefits, employees), it is worth ensuring that everything is in order with a professional.