Is severance pay taxable in Israel?

Section 9(7a) of the Income Tax Ordinance (New Version) exempts severance pay up to a statutory ceiling that the Tax Authority updates annually; the exempt amount tracks the higher of the employee's last monthly salary multiplied by years of service or a fixed per-year cap. Amounts within the ceiling reach the employee tax-free, which is why most ordinary dismissals produce no tax at all. Severance exceeding the ceiling, common for senior or long-tenured staff, is treated as ordinary work income in the year it is received and taxed at the individual's marginal rate. An employee can apply to spread that excess over up to six tax years, which often lowers the effective rate by using lower brackets across several years.

For a foreign worker leaving Israel, timing and residency matter. If you receive severance while still an Israeli tax resident, the exemption and spreading rules apply normally; if you have already become non-resident, the characterization and any treaty relief should be checked before the employer withholds. Where severance was funded through a Section 14 arrangement and sits in a pension or severance fund, releasing it as cash can trigger tax, while leaving it in a qualifying fund can defer it. Ask the employer for a Form 161 and obtain a tax-coordination (te'um mas) ruling so the correct exemption is applied at source rather than over-withheld and reclaimed later. Our guide to severance pay for foreign workers covers the entitlement itself.

From the full guide: Severance Pay in Israel for Foreign Workers

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