Knesset panel passes 2025 tax hikes set to hit working people in their pockets
Finance committee approves Jan. 1 tax measures, including VAT hike, increase in National Insurance payments, and freeze on income tax brackets to rein in ballooning war costs
Sharon Wrobel is a tech reporter for The Times of Israel.

In less than a month, a series of tax hikes are slated to go into effect that will erode the income of Israel’s working population, which is already struggling to make ends meet amid the rising cost of living during the ongoing war with the Hamas terror group.
The Knesset Finance Committee on Monday approved in a second and third reading tax measures to bolster state income and fill a fiscal gap amid high defense expenses, as the country is more than 14 months into a war with Hamas in Gaza. The measures, which are expected to come into effect on January 1, include raising National Insurance payments, deducting one day of recuperation payments from salaried employees, freezing income tax brackets and tax credit points, and increasing value-added-tax from 17 percent to 18%.
Additionally, it was decided that the surtax levied on the country’s wealthiest will be raised from the current 3% to 5%. The surtax applies to earners of passive annual income exceeding NIS 721,560. The tax hike will yield NIS 1 billion ($278 million) for the state’s coffers in 2025, and NIS 1.5 billion each year thereafter, according to the Finance Ministry.
The changes are part of the 2025 state budget, which includes an austerity package of tax hikes and steep spending cuts of a total of NIS 37 billion to offset ballooning war costs. Israeli lawmakers on Monday night narrowly passed the first reading of the state budget for 2025.
The approval of the tax-related measures comes as the government has been sharply scrutinized for failing to lead by example to help carry the financial war burden during the war effort as safeguarding its right-wing coalition prevented additional cuts. In recent months, opposition leaders, business owners and entrepreneurs have been urging the government to significantly cut the billions of shekels in discretionary coalition funds and shut down unnecessary government ministries. Instead, most of the burden is falling on the working population.
Speaking at the Knesset Finance Committee meeting, Yesh Atid MK Naor Shiri bashed the participants for voting in favor of a NIS 20 billion increase in taxes.

“The entire budget is being taken from the citizens’ pockets,” said Shiri. “None of the needed efficiency measures were taken and not a single ministry will be closed.”
In 2025, the tax hikes and measures are expected to yield about NIS 3.8 billion for the state’s coffers, in 2026 about NIS 5.1 billion, and in 2027 over NIS 6.5 billion. From 2028 onwards, the measures will add NIS 6.6 billion a year.
List of tax-related measures
The planned 1% VAT increase is likely to hurt mainly the poor and worsen inequality in Israeli society. VAT is an indirect tax that is collected through the purchase of goods and services, and is levied on most consumer goods and services, except for fresh produce. The hike, which is expected to trickle down to consumers, will affect the prices of most transactions from groceries, cars, and the cost of new apartments.
It is a regressive tax, meaning that a higher rate harms the lower-income population more than higher earners, and contributes to increasing the already high cost of living in Israel.
The planned freeze of income tax brackets and tax credit points means that they will not be adjusted higher in line with inflation. As consumer prices are expected to be around 4% this year and 3% next year, many workers may end up seeing their real post-tax incomes drop. In practice, taxpayers will be left with less disposable income while consumer prices will be increasing.
National Insurance contributions, which include health tax payments, will be increased, with the expectation of adding between NIS 1,000 to NIS 2,000 a year to an average household. National Insurance contributions are often described as a form of tax, as they are collected by the state to finance public goods.