Income Tax to Be Israel's Largest Revenue Source in 2026

Income tax is projected to be Israel's single largest source of state revenue in 2026, with an estimated collection of 288.4 billion shekels. This figure represents approximately one-third of the total projected state income of 850.6 billion shekels and about 52% of all tax collections, excluding loans and bonds. The term "income tax" is a simplification, as it encompasses two distinct taxes: one levied on individuals through progressive tax brackets based on income, and another on corporate profits at a uniform rate. These are collected through different mechanisms and respond differently to economic fluctuations.

While the 2026 budget lists the total income tax revenue as a single line item, a breakdown is available from actual collection data. For 2025, the actual collection from employees' salaries was 156.4 billion shekels, significantly exceeding the planned 98.8 billion. Corporate tax collection reached 85.2 billion shekels against a plan of 81.2 billion. Conversely, advance payments from self-employed individuals fell short, with 22.8 billion collected against a planned 32.6 billion. This pattern of overcollection from salaries and undercollection from self-employed advance payments was also observed in 2024.

The progressive tax brackets for individuals have been adjusted for 2026, with the 20% bracket extended up to a monthly income of 19,000 shekels (previously 16,150) and the 31% bracket extended to 25,100 shekels (previously 22,440). A 3% surtax applies to annual incomes over 721,560 shekels, and an additional 2% tax on capital gains and dividends applies to incomes above this threshold, bringing the total to 5% for such income. Tax credits, valued at 242 shekels per month in 2026, reduce the actual tax burden, particularly for lower-income earners.

Corporate tax remains at 23% in 2026, applied to taxable profits. An additional tax of 25% or 30% is levied on dividends distributed to shareholders, potentially bringing the effective tax rate on distributed profits to around 45%. However, preferential tax rates of 12% or 7.5% are available for qualifying technology enterprises under the Law for the Encouragement of Capital Investments. Starting in 2026, Israel will implement a global minimum tax of 15% for multinational corporations with revenues of 750 million euros or more, as per OECD guidelines.

The significant difference between planned and actual tax collection, particularly in the corporate sector and from capital markets, is attributed to the delayed reporting of profits and market fluctuations. While salary deductions provide a stable and predictable revenue stream, corporate tax and capital gains are more volatile, often resulting in collection surpluses in years with strong market performance. The 2026 forecast of 288.4 billion shekels represents a conservative increase of approximately 3.7% over 2025 collections.