Israeli Workers Entitled to One Month's Salary per Year in Severance Pay with 2026 Tax Exemption Cap

In Israel, employees who are dismissed after at least one year of continuous service with the same employer are generally entitled to severance pay calculated as one month's salary for each year worked. For example, an employee earning 12,000 shekels monthly with five years of service would receive 60,000 shekels in severance. This entitlement also extends to employees who resign under specific conditions recognized by law as equivalent to dismissal, such as significant deterioration in working conditions, relocation under certain circumstances, health issues, or military service.

Since 2008, most workplaces have implemented a monthly pension fund contribution system for severance pay, set at 8.33% of the monthly salary. This rate corresponds to one month's salary per year of employment, ensuring full coverage of severance pay through pension savings. When full contributions are made, employees receive the accumulated funds even if they resign, subject to Section 14 provisions.

Regarding taxation, severance pay benefits from an income tax exemption up to a ceiling of 13,750 shekels per year of service in 2026. The exemption applies to the lower of two calculations: the last monthly salary multiplied by 1.5 times the years of service, or the annual exemption ceiling multiplied by years of service. Amounts exceeding this threshold are taxable at the employee's marginal tax rate. For instance, an employee earning 20,000 shekels monthly with five years of service may have 68,750 shekels exempted, with the remainder subject to tax.

Additional rights upon termination include advance notice periods, issuance of Form 161 and release documents by the employer, and timely payment of severance without undue delay. Failure to pay severance promptly can entitle the employee to compensation for delayed payment. The law also outlines specific cases where resignation qualifies for severance, such as health-related reasons or retirement.

Employees can verify their severance entitlements using official calculation tools that consider salary components and tenure. The full legal framework ensures workers receive due compensation and tax benefits upon ending their employment relationship.