Israel Expands 20% and 31% Income Tax Brackets for 2026, Benefiting Mid-Income Earners

Israel's income tax brackets for 2026 have been adjusted to widen the 20% bracket from 16,150 to 19,000 shekels per month and the 31% bracket from 19,001 to 25,100 shekels. This change, separate from the frozen indexation law between 2025 and 2027, effectively lowers tax rates for hundreds of thousands of salaried workers by keeping more income taxed at lower rates, potentially saving up to 420 shekels monthly.

The updated monthly tax brackets for 2026 are: 10% up to 7,010 shekels, 14% from 7,011 to 10,060, 20% from 10,061 to 19,000, 31% from 19,001 to 25,100, 35% from 25,101 to 46,690, and 47% from 46,691 to 60,130 shekels. An additional surtax of 3% applies to annual incomes exceeding 721,560 shekels, with capital income taxed at higher rates.

For example, a worker earning 15,000 shekels monthly pays 2,116 shekels in income tax before credits, with one credit point worth 242 shekels per month. Tax credits reduce the effective tax burden significantly. A salary of 19,000 shekels benefits from a monthly tax saving of about 314 shekels, while at 25,100 shekels, the maximum monthly saving reaches approximately 420 shekels. Higher earners do not see additional benefits beyond this point as the expanded brackets are fully utilized.

The article also explains the layered nature of Israel's tax system, where only income above each bracket threshold is taxed at the higher rate, and highlights the importance of annual tax reconciliation through Form 106. It notes that non-salary income such as capital gains and dividends are taxed differently, affecting overall tax planning. Additionally, social security and health insurance contributions, as well as pension payments, are deducted separately from income tax.

This tax bracket adjustment primarily benefits those earning between 16,000 and 25,000 shekels monthly, increasing their net income by shifting portions of their salary into lower tax brackets. Workers earning below 14,000 shekels monthly are unaffected as their income remains within unchanged brackets. The changes aim to ease the tax burden on middle-income earners without altering the top marginal rates or surtaxes.