Tax Refund on Severance Fund — Complete Guide for Employees

What is a severance fund and who is it relevant to?

A severance fund is mandatory savings that employers pay for their employees. It is part of Israel's social benefits — similar to national insurance and pension. Typically, your employer pays a percentage of your salary into the fund, and sometimes you also pay part of it yourself.

This amount accumulates in an account in your name, and you can use it for various purposes — purchasing a first home, retirement from work, or in certain cases of financial hardship. But in return for all this, you have a tax right: a severance fund deduction from taxable income.

This right applies to every employee who has contributions to the fund. It doesn't matter if you work for a large company, a startup, or a small business — if money is deducted to the fund from your salary, you are entitled to a tax refund.

How is the Training Fund Deduction Calculated in a Tax Return?

Essentially, the deduction occurs in two stages: first, in your salary slip, and second, in your annual tax return.

On your salary slip, various amounts are deducted each month. It may be that your employer pays 8.33% of your salary to the fund (this is like a mandatory contribution), and you pay an additional 5% or 10% yourself (additional contribution). All these amounts accumulate on your slip.

In the annual report you submit to the Israel Tax Authority, you report all the deductions that were withheld from you during the year. The Tax Authority examines your income, the deductions, and calculates how much tax you actually owe. If the deductions are greater than the tax owed, you receive a refund.

This is not magic — it is simply mathematics. If in January your income was 5,000 shekels and 400 shekels were deducted for the fund, the taxable income is 4,600 shekels. On the smaller amount, you pay less tax.

Steps for Filing a Tax Refund for a Training Fund

The tax refund filing process is simpler than most people think. Here are the steps:

1. Collect your pay stubs. At the end of the year, every employer sends you an annual summary statement (or you can print it from the employer's system). This statement will show all the deductions taken from your training fund during the year.
2. Verify the employer's report to the Tax Authority. The employer submits a report to the Tax Authority with all salary and deduction information. This happens automatically, but it is advisable to verify the data is correct. If there is an error, you can correct it in your report.
3. File an annual tax return. In your annual tax return, you report all deductions (training fund, National Insurance, pension, etc.). This report is submitted to the Tax Authority. Most employees can file a relatively simple report.
4. Wait for your refund. If you have filed correctly, you will receive a refund. The timeframe varies — typically from a few weeks to several months, depending on the Tax Authority's workload.

If you work for a small business or an employer who does not file organized reports, matters can become more complicated. In any such case, it is advisable to consult with an accountant.

Common Mistakes Made by Self-Employed and Independent Contractors

In our work with clients in Petah Tikva, Ramat Gan, and the Central District, we have seen recurring mistakes that can delay refunds or even lead to an investigation by the Tax Authority. Here are the most important mistakes:

• Failure to report a study fund in the annual report. People assume reporting happens automatically, but it does not always. If you do not report it, you will not receive a refund. This is the most common mistake.
• Reporting an incorrect amount. Sometimes there is a discrepancy between the amount deducted from the payslip and what is reported to the Tax Authority. If the numbers do not match, the Tax Authority may request explanations.
• Failure to distinguish between mandatory and voluntary contributions. Sometimes employers make two levels of contributions. If you do not distinguish between them in the report, you may miss part of the deduction.
• Reporting a study fund when you are not entitled to one. This is rare, but if you are self-employed or an independent contractor, the rules are different. For an exempt contractor or licensed contractor, you do not have a study fund like an employee. If you report it, you will pay a fine.
• Failure to update address or identity details. If the Tax Authority cannot reach you, the refund may be delayed or canceled.