Is severance pay taxable in Israel?

Partly. Section 9(7a) of the Income Tax Ordinance exempts the lower of your final monthly salary or the annual ceiling (approximately NIS 13,750 in 2026), multiplied by your years of service. Anything above that figure is taxed as employment income at your marginal rate, which can reach 47% plus surtax.

Do I pay National Insurance on Israeli severance pay?

No. Severance pay is not subject to National Insurance Institute contributions or health tax. Payment in lieu of notice, unused vacation days and recuperation pay are ordinary salary, and full National Insurance contributions apply to them.

What happens if I do not complete Form 161A?

The employer or the pension fund withholds tax at the maximum marginal rate on the whole grant, including the part that would have been exempt. Recovering the difference requires filing an Israeli annual tax return. Section 160 of the Income Tax Ordinance allows refund claims within six years of the end of the relevant tax year.

Tax & Finance

Severance Pay Tax in Israel: Form 161, Exemptions, and What Departing Employees Pay

By Adv. Eli Shimony September 9, 2026 13 min read

      Quick Answer: Severance pay in Israel (pitzuim) is not automatically tax free. Section 9(7a) of the Income Tax Ordinance exempts the lower of your final monthly salary or the annual ceiling, roughly NIS 13,750 for 2026, multiplied by your years of service. Whatever exceeds that is employment income taxed at your marginal rate, up to 47% before surtax. The election you make on Form 161A in the weeks after you leave decides whether you pay tax now, defer it, or quietly shrink the tax-free pension you can draw thirty years later.
    

Most people meet the Israeli severance tax rules at the worst possible moment. You have just been let go, or you have resigned to take a job in Berlin or Boston, and an email arrives from your employer's payroll department with a link to a Hebrew government form and a deadline. The money sitting in your pension fund looks like yours. Some of it is. A meaningful slice may belong to the Israel Tax Authority (Rashut HaMisim), and the amount depends on choices you make in that form rather than on anything your employer decides.

This guide walks through the tax side of Israeli severance: what the Tax Authority treats as a taxable grant, how the exemption is calculated, what each option on Form 161A actually commits you to, and what changes when you are a foreign national who is about to leave the country. For the employment law question of whether you are entitled to severance at all, see our guides on severance rights for foreign workers and resigning without losing severance.

1. What Counts as a Retirement Grant

The Severance Pay Law 5723-1963 gives an employee with at least twelve months of continuous service one month's salary for every year worked. Under the mandatory pension extension order, most of that money has already been deposited month by month into a pension fund or managers' insurance policy as the severance component, either 6% or the full 8.33% where a Section 14 arrangement applies.

For tax purposes, the Tax Authority looks at the total ma'anak prisha (retirement grant) you receive when the employment ends. That includes the severance balance released from the fund, any top-up the employer pays directly, and discretionary payments such as an adaptation grant (ma'anak histaglut) or a goodbye bonus tied to the departure. All of it is tested against the same exemption ceiling.

Several payments that arrive in the same final payslip are not part of the grant and get no exemption at all:

Payment in lieu of notice (tmurat hoda'a mukdemet)
Redemption of unused vacation days (pidyon yemei chufsha)
Recuperation pay (dmei havraa) and any outstanding bonus or commission

These are ordinary employment income, taxed at your marginal rate in the month they are paid, and National Insurance Institute (NII) contributions apply to them. Severance itself is different: no NII contributions and no health tax are deducted from it. That distinction alone is worth several thousand shekels on a typical exit package, and it is a common source of confusion when employees compare their final payslip with their colleagues'.

      In Practice: A product manager in Herzliya earning NIS 22,000 a month leaves after six years. Her severance entitlement is NIS 132,000, sitting in a Migdal managers' insurance policy. Her final payslip separately shows NIS 22,000 notice pay, 18 unused vacation days worth about NIS 16,300, and NIS 2,470 in recuperation pay. The NIS 40,770 of salary items is taxed in full at her marginal rate with NII contributions on top; only the NIS 132,000 enters the Section 9(7a) calculation. Section 20 of the Wage Protection Law 5718-1958 treats severance as delayed once fifteen days pass from the termination date, and the Regional Labor Court (Beit Din Ezori LaAvoda) can award delayed severance compensation on top of the principal. Employers who wait for the employee to sign a general release before instructing the fund are the usual defendants in these claims.
    

2. The Section 9(7a) Exemption Ceiling

Section 9(7a) of the Income Tax Ordinance [New Version] 5721-1961 sets the exemption with a simple formula that trips up high earners. The exempt amount equals your years of service multiplied by the lower of two numbers: your final monthly salary, or the annual ceiling published by the Tax Authority, approximately NIS 13,750 per year of service for 2026. The ceiling is updated each January, so confirm the current figure before running any calculation.

Partial years count proportionally. Nine years and four months gives you 9.33 years of exemption, not nine. If your final salary is below the ceiling, your salary is the multiplier, which is why part-time and lower-paid employees usually walk away with a fully exempt grant while senior employees do not.

Two adjustments are worth knowing. The assessing officer (pakid shuma) has discretion to approve an increased exemption above the standard ceiling, up to 150% of it, in defined circumstances such as ill health or forced early retirement, and this requires a reasoned application rather than a tick box. Where the employee has died, the grant paid to survivors carries a higher exemption than the standard retirement ceiling, and Form 161B is used instead of the usual employee declaration.

      In Practice: Take the same Herzliya product manager. Her salary of NIS 22,000 is above the 2026 ceiling, so the multiplier is NIS 13,750. Six years of service gives an exempt grant of NIS 82,500. The remaining NIS 49,500 is taxable employment income. At a marginal rate in the 31% to 35% band, she pays roughly NIS 15,000 to NIS 17,000, and the insurer withholds it at source before releasing the balance. Had she earned NIS 12,000 a month instead, the entire NIS 72,000 would have been exempt. The tax bill here comes from the gap between her salary and the ceiling, not from anything she did wrong, and the only lever she controls is the election she makes on Form 161A.
    

3. Form 161, 161A and the Digital Filing

Israeli severance tax runs on a family of forms, and each one has a different author:

Form 161 is filed by the employer. It reports the termination date, the years of service, the final salary and every component of the grant.
Form 161A is filed by the employee. This is where you declare prior grants, request the exemption, and choose what happens to the money.
Form 161B is used by survivors when an employee dies in service.
Form 161D is filed decades later, at pension age, to fix your pension exemption rights (kibua zchuyot) under Section 9a.

Since January 2024 the process runs through the Tax Authority's digital Form 161 system. The employer submits the 161 electronically, and you receive a link to complete your 161A online. Ignoring that link has a predictable result: the payer applies the maximum marginal withholding to the whole grant, including the part that should have been exempt. Nobody chases you, and nobody is required to warn you. Israeli payroll departments send the link and consider the matter closed.

Where the numbers are unusual, or you want an exemption above the standard ceiling, the assessing officer issues a specific instruction to the fund. Allow several weeks for that, and expect the fund to sit on the money until it has written confirmation of the withholding rate.

      In Practice: A French engineer finishing four years at a Tel Aviv startup flies to Paris eleven days after his last working day. The digital 161 link reaches an Israeli work address he no longer reads. Nine weeks later the fund releases his NIS 148,000 severance with 47% withheld, about NIS 69,500, when a completed 161A would have exempted NIS 55,000 and cut the bill by roughly NIS 25,800. Recovering it means filing an Israeli annual return (Form 1301) for that tax year and waiting three to nine months for the assessment. Section 160 of the Income Tax Ordinance gives him six years from the end of the tax year to claim, so the money is not lost, but the Tax Authority pays refunds only into an Israeli bank account. Closing that account on the way out of the country is the mistake that turns a delay into a real loss.
    

4. Cash, Severance Continuity or Pension Continuity

Form 161A asks you to choose among three treatments, and the choice is difficult to reverse once the fund has acted on it.

Withdraw the grant. The exempt portion reaches your account tax free, the excess is taxed at your marginal rate, and the file is closed. This is the default for anyone who needs cash or is leaving Israel permanently.

Severance continuity (retzifut pitzuim). The money stays in the fund and carries over to your next Israeli employer, so the exemption is eventually calculated on your combined seniority rather than on each job separately. Tax Authority rules require you to start the new employment within a defined period, generally up to a year, and to leave the funds untouched in the meantime. Withdraw early and the continuity election collapses, with tax assessed as though you had taken the money at the original departure date.

Pension continuity (retzifut kitzba). The severance is treated as retirement savings instead of a grant. No tax now. The money is taxed later as pension income, when the Section 9a exemption for an entitling pension applies, and the sum keeps compounding inside the fund in the meantime.

For a mid-career employee moving between two Israeli employers, continuity is usually the stronger option because it preserves both the exemption and decades of compounding. For someone boarding a plane with no plan to return, the practical value of continuity is close to zero, and the withdrawal route is normally correct.

      In Practice: An oleh from Toronto leaves a Jerusalem biotech company after four years with NIS 190,000 in the severance component of his Menora pension fund. He signs with a Rehovot employer eleven weeks later and elects retzifut pitzuim on his 161A. No tax event occurs, and the fund keeps the balance invested. Five years later he leaves the second job with nine years of combined recognized seniority, and his exemption is calculated on the whole period, around NIS 123,750 at the current ceiling, rather than on two separate four and five year slices. Had he withdrawn the NIS 190,000 in the gap between jobs, the continuity election would have been void and the exempt portion would have been locked to his first employment period alone.
    

5. The Cost to Your Future Tax-Free Pension

Here is the part that surprises people, including some Israeli accountants. Withdrawing exempt severance today reduces the tax-free pension you can draw at retirement.

Section 9a exempts part of an entitling pension (kitzba mezaka) once you reach pension age. The exemption is a percentage of a monthly ceiling, roughly NIS 9,430 in 2025 with an exemption rate of 52%, both updated periodically. Translated into a capital sum, that is an exemption pot of a little under NIS 900,000 spread across 180 months of pension.

The combining formula (nusḥat hashiluv) then applies. Every shekel of exempt severance you withdrew during the 32 years preceding retirement reduces that pot by 1.35 shekels. You claim what is left on Form 161D at pension age, and the reduction is permanent.

      In Practice: The same product manager withdraws NIS 82,500 of exempt severance at age 47. Twenty years later she applies for kibua zchuyot on Form 161D. The Tax Authority multiplies the withdrawn exempt amount by 1.35, giving NIS 111,375, and deducts that from her exemption pot of roughly NIS 882,000. Divided across 180 months, her tax-free monthly pension entitlement falls by about NIS 619. Over a fifteen year retirement that is roughly NIS 111,000 of pension moved from the exempt column to the taxable one. Whether the trade is worth it depends on her marginal rate now versus in retirement, and on what the NIS 82,500 does in the meantime. It is a real decision, and Form 161A is where it gets made, usually without anyone explaining it.
    

6. Spreading the Taxable Part Under Section 8(3)

When the taxable slice of a grant lands in a single year, it stacks on top of your regular salary and is taxed at the highest rates you reach that year, up to 47% before the 3% surtax on annual income above roughly NIS 721,000. Section 8(3) of the Income Tax Ordinance offers a way out through spreading (pris).

Forward spreading allocates the taxable grant across future tax years, broadly one year for every four years of service, capped at six years. It works best when you leave mid-career with a high departure-year income and expect lower earnings afterwards, or when you retire and your income drops sharply. Backward spreading over the years the grant relates to is available in defined situations and requires amended assessments for those years.

Two conditions catch people out. Spreading needs the assessing officer's approval, so file the application before the payment where possible. And spreading forward means filing an Israeli annual return for each of those years, which is an unwelcome commitment for someone who has just emigrated and hoped to close their Israeli tax file.

      In Practice: A department head retires from an Israeli manufacturer after 24 years with a NIS 460,000 grant, of which NIS 320,000 exceeds the Section 9(7a) exemption. Taken in one year on top of nine months of salary, most of the excess falls in the 47% band, costing about NIS 150,000. His accountant applies to the Tel Aviv assessing officer for six-year forward spreading under Section 8(3), the maximum his 24 years of service allow. His only later income is a modest pension, so the annual NIS 53,333 slices are taxed largely in the 14% to 20% bands, cutting the total to roughly NIS 55,000. He files a return for each of the six years. Approval applications typically take several weeks, so the request goes in before the fund releases the money rather than after.
    

7. Leaving Israel, Non-Residents and Refunds

Severance earned for work performed in Israel stays taxable in Israel. Section 4A of the Income Tax Ordinance sources employment income to the place where the work was done, and Article 15 of Israel's tax treaties follows the same logic. Becoming a German, British or American tax resident the month after you leave does not move the severance out of the Israeli net, and the fund will still withhold at source.

Practical points for departing employees and foreign nationals:

Keep an Israeli bank account open. Tax Authority refunds are paid only into Israeli accounts, and closing yours is the single most common reason a refund stalls.
US citizens remain taxable at home on the full grant. The portion that Israel exempts under Section 9(7a) is still gross income for IRS purposes, and no Israeli tax was paid on it to credit against the US liability.
Foreign workers employed under the Foreign Workers Law 5751-1991 in sectors such as construction and caregiving have a separate employer deposit fund (pikadon), released at departure through the Population and Immigration Authority, with deductions applied for overstaying the visa.
Coordinate the severance withdrawal with the rest of your exit, including any pension and study fund withdrawals, since they interact in the same tax year.

      In Practice: A British employee relocating from Ra'anana to London in March 2026 receives NIS 240,000 of severance after eight years, of which NIS 130,000 is exempt. The insurer withholds tax on the NIS 110,000 excess, and because he worked only three months in Israel that year, his actual marginal rate is far below the withheld rate. Filing Form 1301 for 2026 with the Kfar Saba assessing officer produces a refund of roughly NIS 12,000 to NIS 18,000, paid into the Bank Leumi account he deliberately kept open. He also files a Form 1348 declaration of assets where required and confirms his residency change with the National Insurance Institute, since NII status and Tax Authority residency are assessed separately and one does not update the other.
    

Frequently Asked Questions

Two years of service gives you two years of exemption, so the exempt amount is roughly NIS 27,500 at the 2026 ceiling, or twice your final salary if that is lower. A grant below that figure arrives tax free. Anything above it is taxed at your marginal rate. Short service does not remove the exemption; it simply gives you a smaller one, and high earners on short contracts often see a taxable balance.

It applies per period of service, not once in a lifetime, but the Tax Authority tracks prior grants through your Form 161A declaration. You must report exempt grants received in earlier years, since they affect both current calculations and the eventual pension exemption. Under a severance continuity election, the exemption is deferred and later calculated across the combined seniority with the new employer rather than being consumed at each departure.

No. Severance pay is outside the National Insurance contribution base, and no health tax is deducted from it either. The other items in a final payslip are treated differently: notice pay, redemption of unused vacation days and recuperation pay are ordinary salary, and both National Insurance and health tax apply at full rates. Check that your employer classified each component correctly, because errors in this split are common.

The payer withholds at the maximum marginal rate on the entire grant, exempt portion included. On a NIS 150,000 severance that can mean NIS 70,000 withheld where the correct figure was closer to NIS 25,000. Nothing is permanently lost, but you must file an Israeli annual return to claim the difference. Section 160 of the Income Tax Ordinance allows the claim within six years of the end of the relevant tax year.

Yes. Non-residents file the same annual return, Form 1301, for the year of departure, and the assessing officer recalculates the tax on the actual months worked. Refunds take three to nine months and are transferred only to an Israeli bank account, so keep one open. An Israeli accountant or attorney can file with a power of attorney if you are already abroad, which is the usual route once you no longer hold local login credentials.

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Adv. Eli Shimony

Israeli attorney specializing in cross-border transactions, international tax planning, and estate matters. Advises foreign nationals, investors, and diaspora families on navigating Israeli law.

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