Salary Raise vs. Study Fund: Which is Better for Israeli Employees?

Israeli employees facing a choice between a salary increase or a contribution to a study fund (קרן השתלמות) should carefully consider tax implications and personal financial needs, as a study fund often proves more valuable. A direct comparison of NIS 1,000 in salary versus NIS 1,000 in a study fund is misleading because of how taxes affect each. A NIS 1,000 gross salary increase is subject to income tax, national insurance, and health tax, leaving the employee with only NIS 550-650 in net income, depending on their tax bracket. In contrast, a NIS 1,000 contribution to a study fund, up to the legal ceiling, is fully tax-exempt upon deposit. This means the entire NIS 1,000 goes into the fund, with no immediate tax deduction. Furthermore, any profits generated within the study fund are tax-exempt, whereas profits from personal investments are taxed at 25% on real gains.

The tax bracket significantly impacts the benefit. For an employee earning NIS 20,000 monthly and in the 31% tax bracket, a NIS 1,000 gross raise yields about NIS 590 net. The same NIS 1,000 deposited into a study fund remains NIS 1,000, with tax-free growth. For someone in the highest tax bracket (47%), the study fund can be nearly twice as beneficial as an equivalent salary increase. However, for those in lower tax brackets, the difference is less pronounced, making the decision less clear-cut.

Several factors favor the study fund: the common 1:3 employer-to-employee contribution ratio (for every NIS 1 the employee contributes, NIS 3 are added by the employer), the complete exemption from capital gains tax on profits, and the fund's liquidity after six years (or three years for study purposes, or under relaxed conditions at retirement age). Unlike a salary increase, contributions to a study fund do not affect calculations for pension contributions, severance pay, or future salary-based raises.

However, a salary increase might be preferable in specific situations. If an employee has high-interest debt (like an overdraft or loans with double-digit interest rates), paying off that debt with the net income from a raise can yield a better return than the study fund's tax benefits. Additionally, individuals lacking an emergency fund covering three to six months of expenses need immediate liquidity, which a study fund does not provide. Young employees early in their careers, whose future raises and benefits are percentage-based on their base salary, might also prioritize a higher base salary.

Before deciding, employees should ask their employer about the cost of each option to the company, as employers may contribute more to a study fund if it's more cost-effective for them. They should also confirm if the contribution is within the recognized tax-exempt ceiling, as exceeding it negates the tax advantage.