Despite the cost of the war, the Knesset managed to legislate some tax breaks for many individuals in the budget package it passed on March 30.
Income-tax brackets enlarged
The middle-income tax brackets of 20% and 31% have been expanded for income derived on or after January 1, 2026 (Income Tax Amendment 288). This will benefit individuals earning up to NIS 300,000 per year (NIS 25,000 per month) from employment or self-employment.
Consequently, someone with taxable income of NIS 300,000 per year may see their annual tax bill drop from about NIS 62,303 to NIS 57,312 before tax credits and other deductions.
This will not affect the top marginal income-tax rate of 50%, National Insurance Institute payments, passive investment income, nor capital gains.
The foreign tax situation should be checked in each country concerned.
As it is now April, any tax over-withheld by employers may be refunded through the payroll. Others can request a reduction of monthly tax installments or wait until after the end of the year.
Olim tax benefits for Israeli-source income
The new budget measures include additional tax breaks for olim (new immigrants).
Olim already enjoy a 10-year Israeli tax holiday for foreign-source income and capital gains. Starting January 1, 2026, olim may also be exempt from Israeli tax on Israeli-source income – but with more strings attached.
This is thanks to a new law to encourage immigration and return to Israel. The new law is similar but not identical to previous proposals.
What is now exempt?
The exemption applies within monetary limits to Israeli-source active income from a business or employment. There is no exemption for Israeli-source passive income, i.e., interest, exchange differences, dividends, rental income, asset sales, capital gains, and real-estate gains.
The exemption is only for the following years up to the following amounts of business/employment income:
2026 – NIS 600,000;
2027 – NIS 1 million;
2028 – NIS 1m.;
2029 – NIS 350,000;
2030 – NIS 150,000.
The annual limit for amounts received from a related party, as defined in detail (other than a wholly owned company), however, is only NIS 140,000. Presumably, this is to limit family tax planning.
Who is exempt?
The exemption for Israeli-source income is applicable to olim who shifted their center of living and became new Israeli residents between November 5, 2025, and December 31, 2026. The exemption also applies to senior returning residents who were abroad for at least 10 years and resumed Israeli residence during that period.
But the amounts of NIS 600,000 or NIS 140,000 are reduced pro rata to the time in 2026 before the individual took up Israeli residence. For example, if the individual takes up Israeli residence on July 1, 2026, the exemption limits are halved, but the limits for 2027-2030 remain unchanged.
If an individual stops being an Israeli resident in 2028 or 2029 and spends fewer than 75 days in Israel in one of those years, they forfeit the above exemption.
To determine when the individual took up Israeli residence, the one-year “settling in” election (to remain a foreign resident) is ignored; i.e., they may still qualify for the exemption.
What about foreign companies?
The income of a foreign-resident company derived from the work in Israel of an eligible individual is exempt from Israeli corporate taxation – unless the individual is a 10%-or-more shareholder, directly or indirectly, in the company. Israeli VAT would presumably still apply to such a company.
The new law was originally proposed to attract aliyah by Jewish people abroad affected by antisemitism. But there is no incentive to invest in Israel – only to work there and earn no more than the stipulated amounts. If you earn more, you should be exempted up to those caps.
The Israeli tax holiday for foreign-source income and gains remains in place. But the exempt income must be disclosed by people taking up Israeli residence on or after January 1, 2026, under separate legislation.
People who took up Israeli residence between November 5 and December 31, 2025, get the best of both worlds – Israeli income exemption and foreign income disclosure exemption.
People who work online in Israel for foreign companies may enjoy the above new exemption up to the stated limits if they took up Israeli residence between November 5, 2025, and December 31, 2026. Otherwise, they are taxable from day one.
As always, consult experienced professional advisers in each country concerned at an early stage in specific cases.
leon@hcat.co
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.