Detailed Comparison of UK and Israeli Income Tax Systems

When comparing the income tax systems of the UK and Israel, several differences emerge in the way each country determines tax residency, applies tax rates, and offers deductions and credits. Below is a comprehensive and detailed analysis of how each country taxes individuals, including the rules for residents, non-residents, and new immigrants (olim).

1. Residency Rules for Tax Purposes

UK Residency Rules

The UK applies the Statutory Residence Test (SRT) to determine whether an individual is a tax resident. This test is based on several factors, including:

• Days Spent in the UK: If you spend 183 days or more in the UK during a tax year, you are automatically considered a UK tax resident.

• Ties to the UK: Even if you spend fewer than 183 days in the UK, other factors such as having a home, family, or substantial work in the UK can affect residency status.

  • Family tie: If your spouse or children are UK residents.

  • Work tie: If you work 40 or more days in the UK.

  • Accommodation tie: If you have available accommodation in the UK.

  • 90-day tie: If you spent 90 days or more in the UK in either of the previous two tax years.

Taxation:

• Residents: Taxed on worldwide income, including income earned outside the UK.

• Non-residents: Only taxed on UK-sourced income, such as employment within the UK, rental income from UK property, and some investment income.

Israel Residency Rules

Israel applies a different test for tax residency based on the center of life principle. This test looks at various personal, familial, and economic connections to determine residency, including:

• Family and Social Connections: Where your immediate family (spouse and children) live, and where your social ties are strongest.

• Economic Ties: Where you work, conduct business, or manage investments.

• Physical Presence: You are presumed a resident if you spend 183 days or more in Israel during the tax year or 30 days in Israel during the tax year and a total of 425 days over the current and preceding two tax years.

Taxation:

• Residents: Taxed on worldwide income, meaning income earned in Israel and abroad is subject to Israeli tax.

• Non-residents: Only taxed on income sourced within Israel, such as Israeli employment, real estate, or investments.

2. Tax Rates and Brackets

UK Income Tax Rates (2024/2025)

The UK employs a progressive tax system, where income is taxed at increasing rates based on annual income. The personal allowance allows UK residents to earn a certain amount of income before paying tax:

Income Range (GBP)Tax Rate (%)0 - 12,570 (Personal Allowance)0%12,571 - 50,27020% (Basic Rate)50,271 - 125,14040% (Higher Rate)Over 125,14045% (Additional Rate)

• Personal Allowance: GBP 12,570 tax-free income for residents. The personal allowance tapers for individuals earning over GBP 100,000.

Israeli Income Tax Rates (2024)

Israel also follows a progressive tax system, with tax rates increasing as income rises. However, Israel offers tax credit points that reduce the tax burden (see section 4 for details):

Income Range (NIS)Tax Rate (%)0 - 79,56010%79,561 - 114,12014%114,121 - 177,36020%177,361 - 247,44031%247,441 - 514,92035%514,921 - 663,24047%Over 663,24150%

• Israel does not have a personal allowance like the UK but instead uses tax credits to reduce taxable income (explained in section 4).

3. Social Security Contributions: National Insurance vs. Bituach Leumi

UK National Insurance Contributions (NICs)

In the UK, National Insurance Contributions (NICs) fund state pensions, healthcare, and other social benefits. Rates vary depending on income and employment status:

Income Range (GBP)Employee NIC Rate (%)Self-employed NIC Rate (%)0 - 12,570 (Primary Threshold)0%GBP 3.45 per week (Class 2)12,571 - 50,27012%9% (Class 4)Over 50,2702%2% (Class 4)

• Employers also pay NICs for their employees, usually at 13.8% on earnings above GBP 9,100 annually.

Israeli National Insurance Contributions (Bituach Leumi)

In Israel, residents pay Bituach Leumi and health insurance contributions, which fund social services such as healthcare, unemployment benefits, and pensions:

Income Range (NIS)Bituach Leumi Rate (%)Health Insurance Rate (%)0 - 7,1223.5%3.1%Over 7,12212%5%

• Self-employed individuals also pay Bituach Leumi and health insurance contributions based on their net income, similar to employees.

4. Tax Credits and Allowances

UK Deductions and Allowances

• Personal Allowance: GBP 12,570 (tax-free) for all UK residents. This reduces taxable income directly.

• Marriage Allowance: Spouses can transfer up to 10% of their personal allowance to each other, reducing tax for the lower-income spouse.

• Pension Contributions: Contributions to a registered pension scheme are tax-deductible up to an annual limit, usually the lower of GBP 60,000 or 100% of earnings.

• Charitable Donations: Donations to registered UK charities benefit from Gift Aid, which adds 25% to the donation for basic-rate taxpayers, and allows higher-rate taxpayers to claim additional relief.

Israeli Tax Credits (Nikuyim)

Israel uses a tax credit system to reduce the amount of tax owed directly. Each credit point is worth approximately NIS 2,796 per year (2024). Tax credits are granted as follows:

Credit TypePointsBasic personal credit2.25 points for Israeli residentsWomenAdditional 0.5 pointsOlim (new immigrants)3 points for the first year, 2 points for the second year, and 1 point for the next 18 monthsParents (children under 18)1-2 points depending on age

• Pension Contributions: Contributions to Israeli-approved pension schemes are tax-deductible up to specified limits.

• Charitable Donations: Donations to recognized Israeli charities are eligible for a tax credit of up to 35%, provided the donation exceeds NIS 190.

5. Capital Gains Tax

UK Capital Gains Tax (CGT)

UK residents are subject to Capital Gains Tax on the sale of certain assets, including property (excluding your primary residence) and shares. The CGT rates are:

Type of AssetTaxpayer StatusCGT Rate (%)Residential propertyBasic-rate taxpayers18%Residential propertyHigher-rate taxpayers28%Other assetsBasic-rate taxpayers10%Other assetsHigher-rate taxpayers20%

The Annual Exemption is GBP 6,000 (2024/2025), meaning the first GBP 6,000 of capital gains is tax-free.

Israeli Capital Gains Tax

Israeli residents pay capital gains tax on both Israeli and foreign assets, though there are exemptions for certain sales, such as the sale of a primary residence:

Type of AssetTaxpayer StatusCGT Rate (%)Most assetsAll taxpayers25%Controlling shareholders (10% or more ownership)30%

Foreign residents are usually exempt from paying CGT on Israeli investments under specific tax treaties.

6. Special Benefits for Olim Hadashim (New Immigrants)

UK Tax Benefits for Immigrants

The UK does not offer specific tax incentives for new immigrants, though it does have a non-domicile status regime. Individuals who are UK residents but not domiciled in the UK can opt to be taxed.