Israel Sets Severance Pay at One Month’s Salary Per Year With 2026 Tax Exemption Cap

In Israel, employees who are dismissed after at least one year of continuous work with the same employer are generally entitled to severance pay calculated as one month’s salary per year of service. For example, an employee earning 12,000 shekels monthly with five years of tenure 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, amounting to 8.33% of the employee’s monthly salary. This contribution equals one month’s salary per year, covering the severance pay fully if maintained throughout employment. When the employer has made full contributions, the employee receives the accumulated funds even upon resignation, subject to Section 14 provisions.

For 2026, the tax exemption ceiling on severance pay is set at 13,750 shekels per year of service. The exemption applies to the lesser of two amounts: 1.5 times the last monthly salary multiplied by years of service, or the annual exemption ceiling multiplied by years of service. Severance amounts exceeding this threshold are taxable according to the employee’s marginal tax rate. Employees can sometimes request tax payment deferral over several years to reduce liability.

Additional rights upon employment termination include advance notice periods, delivery of Form 161 and release documents, and timely payment of severance without delay. Failure to pay severance promptly may entitle the employee to compensation for delayed payment. Employees dismissed before completing one year of service are generally not entitled to severance, except in special cases. The "Kol Zchut" portal provides a tool for calculating exact severance entitlements based on salary components and tenure.

This comprehensive guide clarifies severance pay rights, calculation methods, tax exemptions, and administrative procedures for employees ending their employment in Israel.