Income tax advances, how the rate is set
Income tax advances are the payment easiest to ignore and most expensive to ignore. They are not an extra tax. They are payment on account of that year's tax, settled at year end. What surprises people is the base: the advance is a percentage of turnover, not of profit.
- The assessing officer sets a rateA percentage of turnover, usually from last year's return
- You report turnover and payBy the 15th, for the period that ended
- Year end settles itThe annual return sets the real tax
- Refund or top-upAccording to the gap between advances and actual tax
Why a percentage of turnover
Because turnover is known in real time and profit is not. The Tax Authority cannot wait for the annual return to collect tax on a year that has already happened, so it collects against an available measure.
The rate is meant to reflect the average ratio between tax and turnover in that particular business. A business with high margins gets a high rate, one with heavy expenses gets a low one. It works reasonably while the business is stable, and less well when it changes.
How the rate is actually set
In the first year, with no history, you declare expected turnover and the assessing officer sets a rate reflecting what is typical in the sector.
From the second year onwards the rate is derived from the last return: tax paid divided by that year's turnover. If you paid 38,000 shekels of tax on 480,000 of turnover, the implied rate is around 8%. The advances calculator does that calculation so you can compare it against the rate you were actually given.
When you report and pay
By the 15th of the month, for the period that ended. Some businesses report monthly and some bi-monthly, according to what was set for them.
Reporting and payment happen together, usually through your account on the Tax Authority site. You report turnover for the period, and the system multiplies it by your rate.
An important note: what you report is turnover, meaning the total of documents issued before VAT. No profit calculation, no expense counting, and no waiting for the bookkeeping to close.
When the rate does not match reality
This happens constantly, in both directions.
When the rate is too high: a business whose income fell, or whose expenses grew, keeps paying at a rate set on the back of a better year. The result is an interest-free loan to the Tax Authority, returned only after the annual return.
When the rate is too low: a growing business pays advances that do not cover the tax, and receives a large bill instead of the refund it expected.
The check is simple: estimate the expected annual tax, for instance in the annual net calculator, and compare it to the total advances for the year.
How to ask for a reduction or cancellation
The request goes on form 2216a, an application to cancel or reduce advances, and it can be filed directly from your account on the Tax Authority site.
The request needs a reason. A drop in turnover, closing an activity, a large one-off expense, or moving into salaried work alongside the business. The assessing officer reviews the figures and decides.
The opposite direction is available too: you can increase advances voluntarily. It sounds odd, but anyone who knows the year will be strong sometimes prefers to spread the payment across it rather than take one large bill.
Advances on excess expenses
Alongside ordinary advances there is a further charge on certain expenses the law defines as excess, for example part of hospitality costs. It is a separate payment credited to the annual tax account, and it is calculated by your bookkeeper.
That is another reason to classify expenses correctly through the year rather than at the end of it. The recognition rates by category are in the deductible expenses guide.
Who is exempt from advances
A self-employed person on the micro-business track is exempt from ongoing advances and settles once, in the short return.
Others receive an exemption or a reduction to zero after a reasoned request. An exemption cancels the payment on account, not the tax itself. Anyone in that position who set nothing aside during the year will meet a full bill in March.
An example across a full year
A consultant with an advance rate of 7%, set from last year's return.
From January to June his monthly turnover runs around 35,000 shekels, and the monthly advance is about 2,450. By the end of June roughly 14,700 has been paid.
In July he closes a large client and monthly turnover jumps to 60,000. The advance rises automatically to 4,200, because it is a percentage of reported turnover rather than a fixed sum. Another 25,200 or so will be paid by year end, bringing total advances to roughly 39,900.
Now the other side. Annual turnover reached 570,000 shekels, expenses were 120,000, and taxable income 450,000. The actual tax on income like that is well above 39,900, so the annual return will bring a top-up demand.
The lesson: advances track turnover, but the rate itself is still last year's. In a year when profitability jumps, the old rate does not cover it, and that is exactly the case for asking to increase advances rather than waiting for the bill.
What happens if you report late
Missing the deadline does not go unanswered. The Tax Authority can issue a best-judgment assessment, meaning it estimates your turnover itself, and that estimate rarely favors you. Indexation and interest accrue on the late payment as well.
Reporting itself takes minutes, and it is possible even when there is no money to pay at that moment. Reporting and arranging payment beats not reporting at all, because the two are counted separately.
A month with no income is reported as zero turnover. That is a report like any other, not a waiver of the obligation.
The confusion with VAT and national insurance
The three payments run in parallel and are unrelated, which is a common source of confusion.
| Payment | Calculated on | Reported to |
|---|---|---|
| Income tax advances | A percentage of turnover | Tax Authority, income tax |
| VAT report | Output VAT minus input VAT | Tax Authority, VAT |
| National insurance | Taxable income, meaning profit | Bituach Leumi |
The same business reports three different numbers to three places, and none of them equals another.
What to actually do
Check quarterly whether the advances at the current pace are approaching the expected tax.
File a reduction request as soon as it is clear the year is weaker than the last one, rather than waiting for the return.
Keep monthly turnover accessible, so reporting on the 15th takes a minute.
Set money aside even when advances are low, particularly in a year when the business is growing.
How Slate presents turnover for the report
Slate shows monthly turnover before VAT straight from the documents issued, so reporting on the 15th needs no manual calculation and no waiting on the accountant. Cumulative income is shown against last year, which is exactly the figure you need to decide whether it is time to ask for a reduction.
This is general information, not tax advice. For a specific situation, talk to an accountant or tax adviser.
Common questions
What are income tax advances?
Ongoing payments on account of the annual tax, calculated as a percentage of turnover rather than profit. The rate is set per business by the assessing officer, usually from the most recent assessment.
When are advances reported and paid?
By the 15th of the month following the reporting period, monthly or bi-monthly as set for the business. A period with no income still gets a nil report.
Can the advance rate be reduced?
Yes. You file a request to reduce or cancel with the assessing officer, on the dedicated form, with reasoning and supporting evidence. Approval is not automatic, and it is better filed before a large overpayment builds up.
How do advances differ from the VAT report?
Advances are a percentage of turnover paid to the Tax Authority's income tax side. The VAT report is output VAT minus input VAT paid to VAT. The same business reports two different numbers to two places.
What if I overpaid on advances?
The excess comes back with the annual return, usually with linkage and interest. Until then the money sits with the Tax Authority, so an inflated rate hurts cash flow even though it returns in the end.
Who is exempt from advances?
A business the assessing officer set at a zero rate, and sometimes a business in its first year before an assessment exists. The exemption is neither automatic nor permanent, and it is revisited once an assessment is filed.