Salary Raise or Keren Hishtalmut: Which Is Better for Employees in Israel?

Imagine your employer is willing to improve your terms. You could negotiate a salary increase, ask them to open a keren hishtalmut fund, or increase contributions to an existing fund.

Which option should you choose?

At first glance, the answer seems obvious: salary is money you can use today. But keren hishtalmut has a major advantage—tax benefits that allow some of the employer's spending to become the employee's personal savings with less lost to taxes.

However, it is easy to make a mistake, especially when comparing a ₪1,000 gross salary increase with a ₪1,000 fund contribution without considering the real cost to the employer, the employee's own share and the effect on pension rights.

What Is Keren Hishtalmut?

Keren hishtalmut (קרן השתלמות) literally means “professional development fund.” These funds were originally set up to finance vocational training. Today, for most employees, they are primarily a medium-term savings vehicle.

Money is deposited into an account in the employee's name and invested according to a chosen investment track. Generally, after six years from the start of saving, the funds may be withdrawn for any purpose while retaining statutory tax benefits. Special rules may allow earlier withdrawals in certain situations, including qualifying training expenses or retirement age (kolzchut.org.il).

An important point: keren hishtalmut is not a mandatory benefit for every salaried employee in Israel. In some industries it is provided under collective agreements or extension orders; in others it depends on the individual employment contract. Where no such obligation applies, an employer is not required to open a fund simply because an employee asks (kolzchut.org.il).

Where Does the Money in the Fund Come From?

A common contribution structure is 7.5% of the relevant salary paid by the employer and 2.5% paid by the employee.

For example, on a qualifying salary of ₪12,000, the employer contributes ₪900 and another ₪300 is deducted from the employee's salary. A total of ₪1,200 goes into the fund every month.

This is where the first misunderstanding arises. Someone may be told, “Your employer will pay ₪1,200 into your fund.” But in this example, ₪300 of that sum comes from the employee's own money.

It is not lost; it moves from current take-home pay into savings. But it is not an additional ₪1,200 paid by the employer.

If the relevant conditions are met, the employer's contributions enjoy tax benefits. The employee's own portion, on the other hand, comes from after-tax salary and does not by itself give a salaried worker another income-tax deduction (kolzchut.org.il).

Why a ₪1,000 Raise Doesn't Mean ₪1,000 Take-Home Pay

Suppose an employee earns ₪20,000 gross and negotiates a ₪1,000 raise.

That entire thousand will not reach the bank account. Income tax, National Insurance, health insurance and an additional employee pension contribution may be deducted.

It is important to use current tax brackets. According to the article, Israel expanded its income-tax brackets on January 1, 2026: a 20% rate applies up to ₪19,000 of monthly taxable income, while a 31% rate applies from ₪19,001 to ₪25,100. In this example, the extra thousand therefore generally falls into the 31% bracket (gov.il).

For a typical salaried Israeli resident below retirement age, the combined National Insurance and health-insurance rate on the relevant salary portion is cited as 12.17% in 2026 (btl.gov.il).

If we also assume that 6% of the entire raise is contributed to the pension fund and the new contribution provides no further tax benefit, the calculation is approximately: ₪310 income tax, ₪121.70 National Insurance and health contributions, and ₪60 employee pension contribution deducted from ₪1,000.

About ₪508 will reach the bank account.

This is an illustration, not a universal formula. The actual take-home amount depends on tax credits, the pension arrangement, salary components and other circumstances.

There is another side to the calculation: the ₪60 pension contribution is not lost. It goes into the employee's own pension savings.

A Salary Increase Costs the Employer More

If the salary increase also raises the insured pensionable salary, the employer incurs additional costs.

In a standard illustration, these could include 6.5% for the employer's pension contribution, 8.33% for the severance component and 7.6% in employer National Insurance on the relevant portion of salary. Under this structure, a ₪1,000 raise costs the employer about ₪1,224 a month, even before other possible costs (kolzchut.org.il).

The right question is therefore not, “What's better—another thousand in salary or another thousand in the fund?”

It is better to ask the employer: “What is the total amount you are prepared to spend on improving my terms, and what would I receive under each option?”

Then compare proposals with the same budget.

Example: The Same Employer Budget

Consider an employee earning ₪12,000 whose employer is prepared to spend an additional ₪900 a month.

Option one is a basic salary increase. If the entire increase raises the pensionable base and the employer's additional costs amount to approximately 22.43%, a ₪900 budget translates into a gross raise of about ₪735.

With an illustrative 20% marginal income-tax rate, 12.17% National Insurance and health contributions, and a 6% employee pension deduction, the employee would take home roughly ₪455. Not all the remaining money goes to the state: some goes into the employee's pension savings, and some represents the employer's pension and severance contributions.

Option two is keren hishtalmut. The employer contributes ₪900, the employee adds ₪300, and ₪1,200 accumulates in the fund each month. The employee's current take-home pay falls by the amount of their own contribution.

If these contributions continue for six years, the total paid in will be ₪86,400, excluding investment returns, fees and changes in conditions.

This example illustrates the fund's tax advantage. But it also shows why it is misleading to say that the employee “received ₪1,200 instead of ₪455.” In the first case, there is spendable income today and additional pension rights; in the second, savings partly funded by the employee.

What If Your Salary Is Already ₪20,000?

Here an important limit comes into play.

In 2026, the tax-advantaged qualifying salary ceiling for an ordinary salaried employee is cited as ₪15,712 a month, or ₪188,544 a year. Under the standard contribution split, the maximum employer contribution within that ceiling is ₪1,178.40 a month (7.5%), and the employee share is ₪392.80 (2.5%)—a total of ₪1,571.20 (kolzchut.org.il).

An employee earning ₪20,000 may agree with the employer on higher contributions. However, amounts above the tax-favored ceiling do not enjoy the same benefits. Excess employer contributions are treated as taxable employee income, while investment profits attributable to excess contributions are taxed on withdrawal under the applicable rules (kolzchut.org.il).

For a high earner, the proposal “instead of a raise, we'll put it all into keren hishtalmut” therefore needs a proper calculation. You cannot assume that every shekel deposited in the fund is tax-exempt.

Why the Fund Can Be Valuable in the Long Run

The fund's main advantage is not simply that the employer contributes money to an account in the employee's name.

The money is invested and may grow if markets perform well. When the conditions are met, tax benefits apply not only to eligible contributions but also to investment gains generated by them.

In a standard investment account, profits from selling securities are often taxable. Keren hishtalmut can preserve the legally provided exemption for eligible investment gains, within the limits and subject to the withdrawal conditions (kolzchut.org.il).

Returns are not guaranteed, however. The value of the savings may rise or fall, depending on the investment track, market conditions and fees.

Do not select a fund solely because of an attractive performance chart from last year. You can compare returns over different periods and risk measures using the government Gemel-Net (גמל נט) system, and compare fees using the Capital Market Authority's official calculator (gemelnet.cma.gov.il).

Six Years Doesn't Mean You Have to Withdraw the Money

Once the fund becomes eligible for withdrawal, the employee is not required to take the money out immediately.

The savings can remain invested in the fund. It may also be possible to transfer them to another keren hishtalmut while retaining accumulated seniority, subject to the relevant conditions (kolzchut.org.il).

This makes the fund useful for goals that do not require cash immediately: a major purchase, a financial reserve, helping children or building additional capital for the future.

But being able to withdraw after six years does not make it a substitute for readily available bank savings. If you might need the money in the coming months, do not treat it as freely accessible cash.

When a Salary Raise Is Better

Consider a different situation: a family runs a deficit every month, uses expensive credit or struggles with mortgage payments.

In this case, additional spendable income may be far more useful than another pot of savings that cannot be accessed freely in the near future.

It makes little sense to invest in a fund if doing so forces the family to take on more high-interest debt. First establish how much is needed for the regular household budget and an emergency reserve.

There is another reason not to dismiss a basic salary increase.

What Happens to Your Pension and Severance Pay?

If an employer offers a fund instead of a raise, check whether the employee would lose other rights.

In Israel, pension contributions are calculated on a defined wage base—sechar kovea (שכר קובע). It includes basic salary and certain regular supplements, but not every payment automatically counts toward pensionable salary.

Under the general mandatory pension arrangement, the employer may be required to contribute only up to a specified ceiling linked to the national average wage, unless a more favorable agreement applies. In 2026, the article cites this figure as ₪13,769 a month. If the employment contract provides for contributions on the full salary, that more favorable agreed base applies (kolzchut.org.il).

So a raise from ₪20,000 to ₪21,000 does not necessarily increase pension contributions. But if the employee's pensionable salary covers the full wage, the raise can have additional effects for many years.

You should also check how a change in basic salary affects the severance component—pitzuyim (פיצויים)—insurance coverage, future allowances and other benefits. They are not all calculated in the same way; some depend on the employment contract or industry agreement (kolzchut.org.il).

That is why the argument “better to put the money in the fund; you'll only keep half of a salary raise anyway” oversimplifies the issue.

Don't Trade Away Benefits You Are Already Entitled To

One more point must be distinguished from ordinary salary negotiations.

If your entitlement to keren hishtalmut is already included in your employment contract, a collective agreement or binding rules in your industry, it is not merely an extra gift from the employer.

An offer that gives an employee a fund in exchange for salary or other mandatory payments already owed cannot be considered beneficial. First establish which conditions the employer is required to provide regardless of any raise negotiation (kolzchut.org.il).

What to Ask Your Employer Before Deciding

The best approach is to compare two written calculations, not verbal promises. Ask your accountant or payroll specialist to show:

1. The amount the employer is prepared to allocate to improving your terms under each option.
2. How much the gross salary will increase and approximately how much will be added to take-home pay.
3. Whether your insured pensionable salary will change.
4. What additional pension and severance contributions will result.
5. How much the employer and the employee will each contribute to keren hishtalmut.
6. What portion of the contributions falls within the tax-advantaged ceiling.
7. What will happen to future bonuses, allowances and other payments linked to basic salary.
8. Whether the offer can be split: some toward a raise and some toward keren hishtalmut.

The last option is sometimes the most reasonable. You do not necessarily have to choose just one of the two.

So Which Option Is Better?

For an employee with a stable household budget who does not need extra cash right away, keren hishtalmut can be a very valuable benefit—especially if the employer offers it on top of existing salary rather than in place of established rights.

For someone who needs more income today, a salary increase may matter more. If it also increases pensionable salary and other long-term benefits, its value extends well beyond the additional money transferred to the bank.

The most sensible approach is to calculate not only today's take-home pay or future savings, but the full value of the offer and all its consequences for the employee.

Sometimes it is better to have more money now. Sometimes it makes sense to direct part of the compensation to a fund. And sometimes the best solution lies between the two.

What matters is understanding exactly why you are accepting less money today and what you receive in return.

This information is general and does not constitute personalized pension, investment or tax advice. The calculations are illustrative and depend on individual circumstances, the employment contract and current legislation.

Author: Evgeny Rekhtman, pension insurance specialist, Pegasus agency.
Phone: 054-599-1090