2025 Israeli Payroll Updates: Operating in Israel’s dynamic business environment requires staying current with employment regulations. The beginning of 2025 brought significant changes to Israel’s payroll landscape that directly impact foreign companies hiring Israeli talent. Whether you’re managing a team through an Employer of Record (EOR) or running your own entity, understanding these updates is crucial for compliance and budget planning
Minimum Wage Increase
Effective April 1, 2025, Israel’s minimum wage increased by 6.25%, marking a significant adjustment that affects calculations across the entire compensation structure.
The New Rates
- Monthly minimum wage: 6,247.67 ILS (up from 5,880 ILS in 2024)
- Hourly minimum wage: 34.32 ILS (up from 32.30 ILS)
- Daily minimum wage (5-day work week): 288.35 ILS per day
- Daily minimum wage (6-day work week): 249.90 ILS per day
Why This Matters
This increase represents more than just a base salary adjustment. It creates a ripple effect throughout your entire payroll system:
Direct Impacts:
- Overtime pay calculations increase proportionally
- Vacation pay bases are recalculated
- Sick pay amounts are adjusted
- Severance fund contributions (Pitzuim) increase to 8.33% of the new base
Indirect Impacts:
- Social contributions to provident funds scale up
- Global overtime wage components may be reduced
- Cost-of-living increments and fixed allowances may need adjustment
Implementation Timeline
The minimum wage update must be reflected in April 2025 salaries, payable at the beginning of May 2025. Employers
must:
- Update payroll systems immediately
- Revise all employee pay slips to reflect the new minimum wage
- Post official notices on workplace bulletin boards (required by the Wage Protection Law of 1958)
- Recalculate all salary-dependent benefits and contributions
Compliance Note: Failing to implement the minimum wage update can result in criminal charges carrying up to one year in prison or fines reaching 226,000 ILS, plus administrative fines ranging from 5,000 to 35,000 ILS per violation.
National Insurance (Bituach Leumi) and Health Tax Rates for 2025
2025 Israeli Payroll Updates – National Insurance:
National Insurance contributions form the backbone of Israel’s social security system. Understanding these rates is essential for accurate payroll processing.
Employee Contribution Rates (Israeli Residents)
The contribution structure is tiered based on monthly income:
For income up to 7,522 ILS/month:
National Insurance: 1.04%
Health Tax: 3.23%
Combined: 4.27%
For income between 7,522 ILS and 50,695 ILS/month:
National Insurance: 7%
Health Tax: 5.16%
Combined: 12.16%
Income above 50,695 ILS: No National Insurance or Health Tax is deducted
Employer Contribution Rates (Israeli Residents)
For income up to 7,522 ILS/month:
National Insurance: 4.51%
For income between 7,522 ILS and 50,695 ILS/month:
National Insurance: 7.6%
Special Rates for Non-Resident Employees
Foreign workers on temporary permits benefit from significantly reduced National Insurance rates:
Employee Contribution (Non-Residents):
0.1% on income up to 7,522 ILS
0.87% on income between 7,522 ILS and 50,695 ILS
Employer Contribution (Non-Residents):
0.75% on income up to 7,522 ILS
2.65% on income between 7,522 ILS and 50,695 ILS
Important Note: These minimal contributions do not provide retirement benefits but generally cover work accident protection. Non-residents are also exempt from Health Tax entirely.
Mandatory Pension Contributions
2025 Israeli Payroll Updates – Pension:
Since 2017, pension contributions have been mandatory for all employees in Israel, representing one of the most significant components of total employment costs.
The Pension Structure
Total Mandatory Contributions: 18.5% of gross salary
This breaks down into three components:
Pension Contribution (12.5% total)
Employer contribution: 6.5%
Employee contribution: 6.0%
Severance Pay Component (8.33%)
Paid entirely by employer
Accumulated in Keren Pitzuim (severance fund)
Available upon termination, even in resignation under Section 14 arrangements
Disability Insurance
Employer contribution: 2.5%
Employee contribution: 0%
Maximum Contribution Ceiling
Pension contributions are calculated on salary up to 50,695 ILS per month. Income above this threshold is not subject to
pension contributions.
Practical Example
For an employee earning 15,000 ILS gross monthly salary:
Employer pays:
Pension: 975 ILS (6.5%)
Severance: 1,249.50 ILS (8.33%)
Disability: 375 ILS (2.5%)
Total employer pension cost: 2,599.50 ILS
Employee contribution:
Pension: 900 ILS (6.0%)
This is automatically deducted from gross salary
Total pension system contribution: 3,499.50 ILS (23.3% of gross salary)
VAT Updates and Implications
Value Added Tax (VAT) in Israel increased from 17% to 18% as of January 2025. This affects:
B2B services provided within Israel
Goods purchased and sold domestically
Import duties and customs calculations
Recuperation pay and certain allowances
Freelancer Note: Freelancers registered as Osek Murshe (authorized dealer) must charge 18% VAT on their invoices. Those registered as Osek Patur (exempt dealer, earning under approximately 102,000 ILS annually) remain exempt from VAT obligations.
Income Tax Brackets for 2025
2025 Israeli Payroll Updates – Tax Brackets:
Israel operates a progressive income tax system. Understanding these brackets helps in accurate tax withholding.
Annual Income (ILS) Tax Rate
0 – 84,120 10%
84,121 – 120,720 14%
120,721 – 193,800 20%
193,801 – 269,280 31%
269,281 – 721,560 35%
721,561 – 1,443,120 47%
Above 1,443,120 50%
Additional Surtaxes:
3% surtax on annual income exceeding 721,560 ILS
Additional 2% surtax on capital income (dividends, interest, capital gains) exceeding 721,560 ILS
Tax Credits (Nekudot Zikui)
Tax credits significantly reduce tax liability. The standard credit structure includes:
- Israeli Resident Credit: 2.25 credit points
- Working Woman Credit: 0.5 additional credit points
- Child Credits: Vary based on age and family circumstances
- Single Parent Credits: Additional credits for single-parent families
- New Immigrant (Oleh Chadash) Credits: For a limited period
- Demobilized Soldier Credits: Granted after military service completion
Each credit point is worth approximately 223 ILS per month (2,676 ILS annually as of 2025).
Employee Benefits: What's Mandatory in 2025
2025 Israeli Payroll Updates – Benefits:
Foreign employers often underestimate the scope of mandatory benefits in Israel. Here’s what you must provide:
Annual Leave (Vacation Days)
Years 1-4: 12 days per year
Year 5: 14 days
Years 6-10: 16 days
Years 11-15: 18 days
Years 16-20: 20 days
Year 20+: 24 days
Paid Religious Holidays
Employees are entitled to 9 paid public holidays annually, which can be used for religious observances. If an employee works on a religious holiday, they receive:
150% of daily wage for the work performed
Plus 100% holiday payment
Total: 250% payment
Sick Leave
Employees accrue 1.5 sick days per month (18 days annually), with a maximum accumulation of 90 days.
Payment structure:
Day 1: Unpaid
Days 2-3: 50% of regular salary
Day 4 onwards: 100% of regular salary
Recuperation Pay (Dmey Havra’ah)
Recuperation pay was partially frozen in 2025, with certain amounts redirected to support reservist benefits. The standard rate is approximately 378 ILS per month of employment, but this has been subject to recent modifications.
Maternity Leave
Duration: 26 weeks total
Paid leave: 15 weeks (paid by National Insurance)
Job protection: Dismissal is prohibited during maternity leave and for a period after return.
Severance Pay (Pitzuim)
Mandatory severance fund contributions of 8.33% of monthly salary are accumulated throughout employment. These funds are typically released upon:
- Termination by employer
- Resignation (under Section 14 arrangements)
- Retirement
Severance is calculated as one month’s salary for each year of service.
Notice Periods and Termination
Understanding termination requirements prevents costly mistakes:
Standard Notice Periods
- First year: No legal requirement (but best practice: 1 day per month worked)
- After 1 year: Generally 30 days for most positions
- Senior positions: May require longer notice based on employment contracts or collective agreements
Section 14 Arrangements
Most employees in Israel work under “Section 14” pension arrangements, where:
- Severance is paid via monthly contributions to a pension fund (8.33%)
- Upon resignation or termination, the employee receives accumulated severance funds
- This applies even to voluntary resignation (major benefit for employees)
Provident Funds: New Reporting Requirements
Effective February 1, 2025, all employers, including those with up to 3 employees, must comply with mandatory
standardized reporting for provident funds.
Version 5 update (effective February 23, 2025) introduces specific considerations for Section 14 employee arrangements.
What This Means for Employers
- Monthly electronic reporting to provident fund providers
- Standardized data formats across all fund providers
- Enhanced compliance monitoring and audit capabilities
- Potential penalties for reporting errors or delays
The True Cost of Employment in Israel
Many foreign companies are surprised by the total employment cost in Israel. Here’s a realistic breakdown:
Calculating Total Employment Cost
For a gross salary of 20,000 ILS, here’s what you actually pay:
Base Salary: 20,000 ILS
Employer Contributions:
National Insurance: 1287 ILS (average rate)
Health Tax: 0 ILS (not paid by employer)
Pension (6.5%): 1,300 ILS
Severance (8.33%): 1,666 ILS
Recuperation: 174.17 (accumulated monthly, paid annually)
Annual Leave: 1,119.38 (cost only, not paid in cash until termination)
Total Monthly Cost: ~25,547 ILS
Effective Cost: 127.735% of Gross Salary
Annual Cost Implications
For a team of 10 employees at average salaries, the additional costs beyond salary can exceed:
Pension and severance alone: ~230,000 ILS annually
National Insurance contributions: ~155,000 ILS annually
Vacation and leave costs: ~85,000 ILS annually
Special Considerations for Foreign Workers
Expert Worker Permits
Israel offers special provisions for highly skilled foreign professionals in fields like technology, engineering, and science:
- Reduced National Insurance rates
- Simplified visa processes for qualifying industries
- Minimum salary requirements (vary by profession and experience)
- Work permit validity typically 12-27 months, renewable
Prevailing Wage Requirements
Foreign workers must generally be paid at least:
- The industry standard salary for their role
- The minimum wage (whichever is higher)
- Comparable to Israeli citizens in similar positions
Totalization Agreements
Israel has social security agreements with 19 countries, which may allow exemptions from Israeli National Insurance for certain foreign workers. Countries include:
- United Kingdom
- Austria
- Belgium
- Germany,And
- 15 others
Notable Absence: Israel does NOT have a totalization agreement with the United States, leading to double taxation issues for American self-employed workers (more on this in a future article).
Misclassification Risks: Employee vs. Freelancer
One of the most significant risks for foreign companies is misclassifying employees as independent contractors (freelancers).
The Labor Court Test
Israeli labor courts examine the actual working relationship, not just the contract title. Red flags include:
Indicators of Employment
- Exclusive or primary work for one client
- Fixed working hours or location requirements
- Integration into organizational structure
- Direct supervision by the client
- Use of client’s tools and equipment
- No business independence
Consequences of Misclassification
If a freelancer is reclassified as an employee:
- Retroactive payments: Vacation days, sick days, pension, severance
- Tax penalties: Unpaid National Insurance and income tax withholding
- Legal costs: Potential labor court claims and legal fees
- Estimated exposure: Can easily exceed €70,000 per misclassified worker
Case Example: A U.S. company engaged a Slovakian freelancer in Israel for several years. When the relationship soured, the freelancer filed a claim with labor authorities. The company faced potential liabilities for social security taxes, vacation pay, severance payment, and additional fines totaling approximately €70,000 (seventy thousand euros).
To further understand and quantify the risk of misclassification, read here.
Compliance Best Practices for 2025
Immediate Action Items
- Update Payroll Systems
- Implement April 2025 minimum wage (6,247.67 ILS)
- Verify National Insurance rate calculations
- Confirm pension contribution accuracy
- Review Employment Contracts
- Ensure compliance with current minimum wage
- Verify notice period provisions
- Confirm severance arrangements (Section 14)
- Post Required Notices
- Minimum wage update notification
- Employee rights information
- Contact details for labor authorities
- Audit Benefit Calculations
- Vacation day accrual rates
- Sick leave accumulation
- Recuperation pay adjustments
- Review Freelancer Relationships
- Assess misclassification risks
- Consider conversion to employment where appropriate
- Document independent contractor status
Monthly Compliance Checklist
- Process payroll by the 9th of the following month
- Submit provident fund reports electronically
- Remit National Insurance and Health Tax contributions
- Process pension fund contributions
- Issue compliant payslips showing all deductions
- Maintain updated employee records
Annual Requirements
- File annual income tax reports (Form 106/856)
- Submit year-end National Insurance reconciliation
- Review and update employment contracts
- Assess compliance with minimum wage updates
- Conduct internal audit of classification (employee vs. contractor)
How an EOR Service Simplifies Israeli Payroll Compliance
For foreign companies without a local entity, managing Israeli payroll compliance can be overwhelming. An Employer of Record (EOR) service like CWS Israel handles:
Full Payroll Management
Accurate calculation of all taxes and contributions
Timely submission of all required reports
Compliant payslip generation and distribution
Currency conversion and international payments
Legal Compliance
Up-to-date knowledge of regulatory changes
Proper classification (employee vs. contractor)
Employment contract drafting and management
Labor law compliance across all touchpoints
Benefits Administration
Pension fund selection and enrollment
Provident fund management and reporting
Severance fund accumulation tracking
Leave management (vacation, sick, maternity)
Risk Mitigation
Protection from misclassification penalties
Compliance with minimum wage and benefit requirements
Defense against labor court claims
Insurance and liability coverage
Cost Transparency
Clear breakdown of total employment costs
No hidden fees or surprise charges
Predictable monthly expenses
Consolidated invoicing
Common Mistakes to Avoid
Underestimating Total Employment Costs
Many companies budget only for gross salary, forgetting the 24-25% in additional employer costs.
Missing the April 1 Minimum Wage Update
Late implementation can result in employee complaints and regulatory penalties.
Incorrect Classification of Freelancers
Working exclusively with one “freelancer” for extended periods raises red flags.
Ignoring Provident Fund Reporting Requirements
The February 2025 updates apply even to very small employers.
Using Non-Compliant Payslip Formats
Israeli law requires specific information on payslips. Generic formats from other countries don’t comply.
Missing Payroll Deadlines
The 9th of the following month is the legal deadline. Late payments can trigger complaints to the labor authorities.
Not Maintaining Proper Documentation
Employment contracts, amendments, leave requests, and disciplinary actions must all be properly documented.
Looking Ahead: Expected Changes in Late 2025
While not yet finalized, several potential changes are under discussion:
- Minimum Wage: Annual adjustment expected in April 2026 (typically 5-7% increase)
- National Insurance Rates: Possible adjustments to address budget deficits
- Recuperation Pay: Further modifications related to reservist support
- Foreign Worker Regulations: Potential changes to expert worker permit requirements
Stay connected with regulatory updates or work with an EOR partner who monitors these changes continuously.
About CWS Israel CWS Israel provides comprehensive Employer of Record (EOR) and Freelancer Shield services, enabling foreign companies to hire and pay talent in Israel without establishing a local entity. With deep expertise in Israeli employment law and a commitment to personalized service, CWS Israel has been the trusted partner for companies ranging from startups to established enterprises since our founding.
This article is for informational purposes only and does not constitute legal or financial advice. Employment regulations can change, and specific situations may have unique considerations. For specific guidance on your situation, please consult with CWS Israel or a qualified legal professional.
Last Updated: October 2025 Next Review: January 2026
