Income Tax on SalaryA complete guide to net pay calculation, tax brackets and credit points
Every month the payslip arrives, and you wonder where the money went. Here you'll understand in plain language how tax brackets work, what credit points are worth, how you get from gross to net · and how NETO manages payroll and deductions so you get an accurate payslip and precise net pay.
AI Summary · Income Tax on SalaryClick to read the page summary
Income tax on salary is calculated using progressive tax brackets · not all income is taxed at the same rate, but rather each slice of salary is taxed according to its own bracket. That's why the effective tax rate (the average across all income) is much lower than the marginal tax rate (on the last shekel). Credit points directly reduce the amount of tax owed · per the source figure, one credit point is worth about ILS 242 a month (ILS 2,904 a year · verify the current figure). Beyond income tax, the payslip also deducts National Insurance, health tax and pension contributions. For employers · NETO calculates all deductions automatically and issues a proper payslip, including lawful payment to freelancers and temporary workers.
- Tax brackets · a progressive system · each slice of salary is taxed at its own rate.
- Credit points · directly reduce the tax · men 2.25, women 2.75.
- Form 101 · sets your credit points · important to update on any change.
- Tax coordination · required when you have more than one income source.
- NETO · calculates deductions and issues a proper payslip for businesses.
- This information is general only · not tax advice · verify current rates.
In brief · key points
Every month the payslip arrives and you look at the net pay wondering where the money went. Income tax is one of the most significant deductions · and understanding how the system works can save you real money and prevent surprises. Here's the essentials in brief.
- Income tax is calculated using progressive brackets · not all income is taxed at the same rate.
- Credit points directly reduce the amount of tax and can save hundreds of shekels a month.
- Tax coordination is essential when you have more than one income source.
- Form 101 sets your credit points · important to update it on any change.
- Income tax is only part of the deductions · there's also National Insurance, health tax and pension.
- Self-employed or salaried? You can calculate your net pay and manage payroll and deductions through NETO.
What income tax on salary is · and how the brackets work
Income tax is a mandatory payment to the state, calculated as a percentage of income. For a salaried employee, the employer deducts the tax directly from the salary and transfers it to the Tax Authority · this is called "withholding at source" and saves you from having to pay tax yourself at year-end. The tax funds public services such as education, health, security and infrastructure.
A progressive system
The more you earn, the higher the tax rate. But here's the point many people miss: not all income is taxed at the same rate. Salary is divided into slices, and each slice is taxed according to its own bracket. Even if you're in a high bracket, most of your salary is still taxed at lower rates.
Marginal vs. effective tax
Marginal tax is the rate on the last shekel you earned. Effective tax is the average rate across all your income. Per the source example, even if the marginal rate is 31%, the effective rate can be around just 15%. This difference is critical to assessing your net pay.
The common mistake
People think that once they enter the 31% bracket, their entire salary is taxed at 31%. That's simply not true. Only the portion that crosses the bracket threshold is taxed at the higher rate · everything else is taxed at the lower brackets beneath it.
| Concept | What it means (example) |
|---|---|
| Marginal tax rate | ~31% (example) · the rate applied only to the last, highest slice of your salary. |
| Effective tax rate | ~15% (example) · the average rate applied across your entire salary. |
For example, if the first bracket runs up to a certain amount at 10% and the second at 14%, only the portion that crosses the first bracket's threshold is taxed at 14%. For the full, up-to-date bracket structure, see Kol Zchut. Tax rates are updated periodically · verify the figures for the relevant date.
Credit points · what you're entitled to
Credit points are the state's way of giving tax relief to different groups. Unlike brackets, which change the tax rate, credit points directly reduce the amount of tax owed. Each point is worth a fixed monetary amount that's deducted from the calculated tax.
According to the source figure (as of 2025), each credit point is worth about ILS 242 a month, which is about ILS 2,904 a year. If, before credit points, your tax was ILS 1,000 a month and you have 2.25 points, they're worth ILS 544.50 · and your actual tax drops to just ILS 455.50. The exact figure is updated periodically · verify the current value of a credit point for the relevant date.
Every Israeli resident is entitled to basic points: men 2.25 points, women 2.75 points. Beyond that there are points that depend on personal circumstances and require proper reporting on Form 101.
| Type of entitlement | Number of credit points | Notes |
|---|---|---|
| Israeli resident (man) | 2.25 | Automatic |
| Israeli resident (woman) | 2.75 | Automatic |
| Children up to age 5 | 1.5 per child | To the mother only, or by choice |
| Children ages 6-17 | 1 per child | To either parent |
| Discharged soldier | 2 | For two years after discharge |
| Academic degree | 1 | For one year after completion |
Additional tax benefits most employees don't know about
Beyond the basic points, there are benefits that require proactive action. Completed an academic degree or a recognized professional certificate? You're entitled to an additional credit point for one year · you need to fill out Form 119. Residents of periphery-area communities are entitled to a special tax credit that can reach significant percentages. And anyone with a family member with a disability may be entitled to additional credit points via Form 116A. All of these can add hundreds of shekels a month to your net pay.
| Benefit | What's required |
|---|---|
| Academic degree / professional certificate | An additional credit point for one year · Form 119 |
| Periphery-area residence | A special tax credit, potentially a significant percentage |
| Supporting a family member with a disability | Additional credit points · Form 116A |
| Filing a detailed annual return | A way to claim benefits and credits not already reflected on the payslip |
From gross to net · calculation on a salary of ILS 12,000
Let's look at a concrete example for a man with 2.25 basic credit points and a monthly gross salary of ILS 12,000. First the tax is calculated according to the brackets (the first part at a lower rate, the next at a higher rate, and so on), and then the credit points are deducted.
This is exactly the difference between marginal and effective tax in practice · the brackets set ILS 900, and the credit points brought the actual payment down to just ILS 355.50. The amounts in this example are for illustration only and are based on the source · verify current tax rates and the current credit-point value.
Why does net pay change even when gross pay stays the same?
Many employees are surprised to see their net pay drop even though gross pay hasn't changed. One reason · tax brackets don't always update in line with the cost of living, and when they're "eroded," you end up paying more tax in practice. A second reason · a change in credit points: if a child passed the age of eligibility, or a discharged soldier's eligibility period ended, the tax rises automatically. Changes in pension contributions or in the value of a company-car benefit also affect net pay.
| Factor | Effect on net pay |
|---|---|
| Tax-bracket update | Brackets not keeping pace with the cost of living can mean more tax in practice |
| Child reaching an age threshold | Loses eligibility for a credit point · tax rises |
| Bonus payment | A one-off payment can push that month into a higher tax bracket |
| Pension-contribution change | Affects both the deduction itself and the related tax credit |
Monthly calculation vs. annual calculation
Tax is calculated on an annual basis, but the deduction from the payslip is monthly · and this sometimes creates gaps. If you started working mid-year, the employer deducts tax as if you'll work the whole year at the same pace, and you may have had too much withheld. A bonus or one-off payment also creates a month with an especially high tax deduction. The annual calculation evens things out, and if you paid too much · you're due a refund. So it's worth checking at the end of every year whether you're owed a tax refund.
Income tax vs. the other deductions
Income tax is just one of several deductions that appear on the payslip. Many employees think everything goes toward income tax · in practice there are additional deductions that aren't related to tax at all, and some of them even come back to you (pension, further-education fund).
| Type of deduction | Where the money goes | Can you affect it |
|---|---|---|
| Income tax | Tax Authority | Yes · through credit points |
| National Insurance | National Insurance Institute | No · fixed rate |
| Health tax | Health funds (Kupot Holim) | No · fixed rate |
| Pension contribution | Your pension fund | Partially · choice of track |
| Further-education fund | Further-education fund | Yes · if there's an employer agreement |
How much National Insurance and health tax are deducted?
National Insurance and health tax are deducted at fixed rates that are updated every year, and split into two brackets · up to about 60% of the average wage in the economy the rate is lower, and above that it's higher. A salaried employee pays National Insurance at rates set by law. Unlike income tax, there's no way to reduce these deductions through benefits or credits · they're calculated automatically based on gross pay. For the updated rates, see the National Insurance Institute website.
Tax coordination and Form 101 · so you don't overpay
Tax coordination is required when you have more than one income source · two jobs at once, or a pension alongside a salary. Without coordination, one employer will deduct tax as if it's your only income, and you'll either pay too much tax (and wait for a refund) or too little (and get a demand for payment).
When tax coordination is required
When you have more than one income source. Tax coordination for employees prevents both overpayment and a debt at year-end · and helps make sure you pay exactly the right amount of tax.
How it's actually done
Online via the Tax Authority website · you enter the details of every income source, the system calculates the tax split, and you get an approval to pass on to each employer. Note · the system closes for a short period at the start of each year.
Form 101 · the employee card
Every salaried employee fills this out at the start of employment and at the start of every tax year: family status, children and credit points. A mistake filling it out costs money · didn't report your children? You won't get the points. Update it whenever your personal circumstances change.
For full details on the process and deadlines, check the Tax Authority website. And young workers too · ages 16-18 are entitled to a special credit point, and combined with part-time, low-wage jobs the tax usually comes out to zero. Just make sure the employer knows they're employing a minor and that Form 101 is filled out correctly.
How NETO manages payroll and deductions · through to a proper payslip
For employers, calculating income tax and issuing payslips is a headache: tax brackets, each employee's credit points, National Insurance, pension contributions and more. NETO handles all of it automatically · calculating deductions based on current figures and issuing a proper payslip, lawfully and accurately. That way the employee gets an orderly payslip and precise net pay, with no mistakes and no issues with the Tax Authority.
Collecting employee data and Form 101
The employee fills out Form 101 · family status, children and credit points · and the data is entered into the NETO system as the basis for an accurate calculation.
Calculating tax by bracket and credit points
The system calculates income tax according to the current tax brackets and deducts the credit points the employee is entitled to · no manual calculations, no risk of error.
Calculating mandatory deductions
National Insurance, health tax and pension contributions are calculated based on gross pay · all according to the rates set by law.
Issuing a proper payslip
NETO issues a lawful, accurate payslip and transfers the employee's net pay to their bank account · full documentation, transparency and compliance with the authorities.
Businesses that work with freelancers and temporary workers benefit too: instead of dealing with invoices, timely payments and bureaucracy · the employer enters the data and NETO handles the rest (issuing documents, calculating payments and reporting to the authorities). Especially suited to businesses that need flexible employment and want to stay on the right side of the law without spending hours on administration.
Frequently asked questions
Can I get a tax refund if I paid too much?
Yes, you can file for a tax refund going back up to six years. If you didn't use all the credit points you're entitled to, or if you only worked part of the year, you're likely due a refund. You need to file an annual return with the Tax Authority or approach a company that specializes in tax refunds.
What happens if I didn't fill out Form 101?
If you didn't fill out Form 101, the employer will deduct the maximum tax without accounting for credit points · meaning you'll pay far more tax than you should. It's best to fill out the form immediately at the start of employment and update it every year or whenever your personal circumstances change.
Do pension contributions reduce tax?
Pension contributions earn a tax credit up to a certain ceiling, so part of the contribution comes back to you as a tax reduction. This is one reason it's worth contributing to pension beyond the legal minimum, budget permitting.
How do I know which tax bracket I'm in?
Your tax bracket is determined by your total annual income. You can calculate it by multiplying your monthly salary by 12 and checking which bracket the top figure falls into. Remember that only the portion that falls within that bracket is taxed at the higher rate, not your entire salary.
What do I do if there's a mistake on my payslip?
If you spot an error in the tax deduction or other data, contact your workplace's payroll department first. If the issue isn't resolved, you can approach the Tax Authority directly. Keep all your payslips as evidence and document your inquiries.
Are teenage workers exempt from income tax?
Teenagers aged 16-18 are entitled to a special credit point that adds to the basic credit points. Combined with the fact that most teenagers work part-time at low wages, the calculated tax usually comes out to zero. It's important to make sure the employer is aware of this and that Form 101 is filled out correctly.
Related guides
More content to help you understand your payslip, your rights and your deductions · and make sure you're not overpaying.
Want to understand your payslip · or streamline payroll at your business?
Understanding income tax on salary is the first step to making sure you're not overpaying and that you're claiming every benefit you're entitled to. Calculate your net salary, or talk to us · we're here.
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