How is severance pay calculated?
The basic formula is set by the Severance Pay Law: the last monthly salary multiplied by the years of service with the same employer or at the same workplace, including a proportional amount for partial years. An employee dismissed after at least one year of service is entitled to severance, and in certain cases resignation also qualifies, for example a material worsening of employment conditions, relocation in recognized circumstances or resignation to care for a child.
- Base salary: the last salary, excluding components such as overtime and expense reimbursements
- Hourly or variable-pay employees: usually calculated using the average of the last 12 months
- Part-time employment affects the base salary proportionally
Section 14: when severance is already funded
Many employers apply "Section 14" of the Severance Pay Law: a monthly severance component is deposited into the pension or provident fund, and those deposits replace severance pay, in whole or in part. In that case the accumulated funds belong to the employee even upon resignation, but there may be no additional top-up from the employer. Reviewing the termination letter and release forms is especially important.
Tax on severance pay
Severance pay is exempt from income tax up to a ceiling per year of service (updated annually, and in some cases increased up to 1.5 times the salary). Amounts above the ceiling are taxed at the employee's marginal rates, and tax spreading over several years may reduce the liability. Before withdrawing severance funds it is also worth checking the pension implications.
Frequently Asked Questions
How is severance pay calculated in Israel?
The basic formula is the last monthly (gross) salary multiplied by the years of service, including a proportional part for partial years. For example, an employee earning ₪15,000 with 6.5 years of service has an estimated entitlement of ₪97,500.
Is an employee who resigns entitled to severance?
Generally no, but there are important exceptions: resignation due to a material worsening of conditions, health circumstances, recognized relocation or child care. In addition, where Section 14 applies, the funds accumulated in the pension fund belong to the employee even upon resignation.
Is severance pay taxable?
Severance is tax-exempt up to a ceiling per year of service, updated annually. Amounts above the ceiling are taxed at the employee's marginal rates; tax spreading or annuity sequencing can be considered.
What if the employer refuses to pay severance?
Document the payment demand in writing and review all final settlement components. Delayed severance may entitle the employee to significant delay compensation, so early legal advice is recommended.
The calculators provide a general estimate only, based on the details entered, and do not constitute legal or tax advice. An exact calculation depends on the specific circumstances, exemptions and possible reliefs.