Severance Pay — Rights and Taxation

Who is entitled to severance pay, calculation methods, taxation, Section 14, and fund withdrawal.

Severance pay (Pitzuyei Piturin) is a major financial right for employees in Israel. By law, any employee who is terminated after at least one year of employment is entitled to one month's salary for each year of service. Understanding how this works can mean the difference between receiving or losing a significant sum.

How Severance Pay Is Calculated

The basic formula is simple: your last monthly salary multiplied by the number of years you worked. If you earned 12,000 NIS per month and worked for 5 years, your severance is 60,000 NIS. Part-years are calculated proportionally. The salary used is typically your base salary including fixed regular components, not one-time bonuses.

Section 14 — The Modern Standard

Most Israeli employers today operate under Section 14 of the Severance Pay Law, which means they deposit the severance component (typically 8.33% of salary) into your pension fund every month. When you leave, those accumulated deposits are your severance. The advantage is that the money is already set aside and belongs to you regardless of the employer's financial situation.

Tax Treatment of Severance Pay

Severance pay receives favorable tax treatment in Israel. There is a tax-exempt ceiling on severance — currently one month's salary per year of service up to a cap that is updated annually. Amounts within the ceiling are tax-free. Amounts above it are taxed as regular income unless you roll them into a qualified pension or provident fund.

What Happens When You Resign?

If you resign voluntarily, you are not automatically entitled to severance under the basic law. However, if your employer uses Section 14, the pension-deposited severance funds are typically released to you regardless. Some situations — like a significant worsening of work conditions — can qualify a resignation as constructive dismissal, preserving severance rights.

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The information on this page is for educational purposes. Please consult a professional before making financial decisions.

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Frequently asked

+−How is severance pay calculated in Israel?

The basic formula is your last monthly salary multiplied by the number of years worked. Five years at 12,000 NIS per month equals 60,000 NIS in severance. Part-years are calculated proportionally.

+−What is Section 14 of the Severance Pay Law?

Section 14 means your employer deposits the severance component (8.33% of salary) into your pension fund monthly. When you leave, those deposits are your severance, regardless of the employer's financial situation.

+−Is severance pay taxed?

There is a tax-exempt ceiling — one month's salary per year of service up to an annually updated cap. Amounts within the ceiling are tax-free. Excess amounts are taxed as regular income unless rolled into a pension or provident fund.

+−Am I entitled to severance if I resign?

Generally no, unless you resign for specific recognized reasons such as health issues, relocation for a spouse, or significantly worsened working conditions. However, under Section 14, the pension deposits are yours regardless.

+−What happens to severance money in my pension fund?

Under Section 14, your employer deposits 8.33% of your salary monthly into your pension as severance. When you leave, you can withdraw this component, leave it in the fund for retirement, or roll it into a new employer's plan.

+−Can I spread the tax on a large severance payment?

Yes, the Tax Authority allows you to spread the tax liability over multiple years (Piruq) to avoid being pushed into the highest bracket in one year. Consult a tax advisor to determine if this strategy benefits you.

+−How do I claim the severance tax exemption?

You need to file a request with the Tax Authority using Form 161. Your employer provides Form 161A with the severance details. The exemption is calculated based on your salary and years of service up to the annual ceiling.