National Insurance for the Self-Employed & Controlling Shareholders

Category: National Insurance | Reading time: about 7 minutes

National Insurance is a solidarity mechanism: every insured person pays contributions based on income, and when the need arises is entitled to a safety net — disability allowance, work-injury pay, maternity pay, old-age pension and more. Unlike an employee, whose employer calculates and remits the contributions, the self-employed person is responsible for registration, payment and reporting. This is exactly where the costly mistakes happen.

How are contributions calculated for the self-employed?

Contributions comprise two components — national insurance and health insurance — and are calculated on the business's taxable income, in two brackets:

• Reduced rate — on the portion of income up to 60% of the average wage (ILS 7,703/month in 2026): 7.7% (of which 4.47% national insurance and 3.23% health insurance);
• Full rate — on the portion above that bracket up to the ceiling: 18% (12.83% national insurance and 5.17% health insurance).

Above the maximum insurable income (the ceiling — ILS 51,910/month in 2026) no contributions are due at all. The two-tier structure matters: you pay 7.7% on the first shekels, but once income crosses 60% of the average wage, every additional shekel (up to the ceiling) carries the full 18%. A self-employed person with mid-to-high income pays very substantial national insurance — often more than expected.

Advances and reconciliation — the heart of ongoing compliance

The self-employed person does not wait for year-end: they pay monthly (or bi-monthly) advances to National Insurance, computed on the latest known annual income. After the annual income-tax return is filed, the Institute performs an annual reconciliation against actual income:

• if actual income was higher than the basis used for advances — a balance due arises;
• if actual income was lower — a refund is received.

Here lies a common cash-flow trap: a business that grew quickly finds a large, unexpected balance due at reconciliation. The fix — proactively update the advance basis when income rises (or falls), rather than being caught at one extreme. Updating advances online in the personal area is simple, and your accountant can set the correct basis.

The "not meeting the definition" trap

Not everyone with business income is treated as "self-employed" for National Insurance purposes. The law sets a minimum threshold of working hours and income to qualify as an insured self-employed person. Someone below that threshold — for example a small side business alongside salaried work — is not insured for the work-injury and maternity branches, even if they paid contributions as self-employed. The consequence is dramatic: a work injury or maternity leave would receive no benefit. Correct registration of status and alignment between reported income and the statutory definitions are therefore critical, not merely technical. There is also a minimum income floor (about ILS 3,442/month in 2026): a self-employed person earning less pays contributions on that floor rather than on their lower actual income.

Controlling shareholder of a closely-held company — the most confusing issue

Someone who runs their business through a limited company and owns it is usually a controlling shareholder of a closely-held company. A "closely-held company" is one controlled by up to five people, and a "controlling shareholder" holds (alone or with a relative) at least 10% of the share capital or has substantive control. The controlling shareholder is treated as an employee of their own company — but with one material exception many are unaware of:

• No unemployment insurance. A controlling shareholder of a closely-held company is not insured for the unemployment branch — no unemployment contributions are paid, so if the company closes or they are dismissed, they are not entitled to unemployment benefit. A painful surprise for anyone who assumed that as an "employee" of the company they were covered like any salaried worker;
• No insolvency protection. Similarly, a controlling shareholder is not entitled to a National Insurance benefit for unpaid wages arising from the company's liquidation/insolvency;
• Work-injury and other branches are covered. The controlling shareholder is insured for the work-injury branch and the other branches (disability, old-age, survivors, maternity) — and pays contributions accordingly (at a reduced rate compared with an ordinary employee, precisely because there is no unemployment component).

A current note: case law has examined situations where a controlling shareholder who was in fact dismissed nonetheless claimed unemployment benefit, and held that in certain circumstances — where they had no real ability to influence the termination or their income — eligibility may not be denied solely because of their holdings. This is a complex legal matter decided case by case — and should not be relied upon in advance as a substitute for proper planning.

← Read our full guide: Limited Company or Self-Employed — which is better and when to incorporate

The under-reporting trap — an illusory saving

Because national-insurance contributions are high, there is a temptation to report income as low as possible to "save." But there is a fundamental flaw here: benefit amounts are computed on the reported income. Maternity pay, work-injury pay, disability allowance and reserve-duty pay are all derived from the income on which contributions were paid. A self-employed woman who reported minimal income will find her maternity pay tiny; a self-employed person injured at work will receive low daily injury pay. The "saving" on contributions turns out to be a far larger loss at the moment of truth. Truthful reporting, besides being a legal duty, is also your financial protection.

Points worth checking — a checklist

1. Ensure correct status registration with National Insurance — self-employed / controlling shareholder / combined with salaried work — the classification directly affects your rights;
2. Update the advance basis when income changes — to avoid a surprise balance due or unnecessary locked-up cash;
3. Controlling shareholders — internalize that you have no unemployment safety net, and consider supplementary private savings/insurance;
4. Do not report too low — your future rights depend on the reported income;
5. At year-end — verify the reconciliation was done correctly, and that the deductible national-insurance component was reflected in the tax computation.

This article is provided for general information only and does not constitute professional advice or a substitute for personal advice. Contribution rates, brackets and ceilings are updated from time to time. For any question, please contact us and we'll be glad to assist.

Best regards,
Hager-Alperowitz & Co. — Certified Public Accountants