Personal taxes

All persons who are taxable in Iceland and who have an income exceeding the tax-free limit, shall pay taxes on their wages which shall accrue to a joint national fund. Tax shall also be paid on capital gains.

Personal tax allowance

  • The personal tax allowance is a tax discount. Everyone aged 16 and older and who resides in Iceland is entitled to a personal tax allowance.
  • The personal tax allowance is fully transferable between spouses or cohabitants.
  • Personal tax allowance may accrue between months and, as appropriate, the allowance that one spouse has not used may be used by the other.
  • Accrued personal tax allowance that is not utilised within the tax year will lapse at the beginning of the new year.

Taxes on the wages of individuals

  • Taxes on the wages of individuals are divided into state income tax, on the one hand, and, on the other, municipal income tax that is paid to the local authorities.
  • Tax-free limits take account of personal tax allowance and the withholding tax percentage. These are the limits that are taken into account before taxes are paid on wages.
  • The employer deducts the withholding tax from the salary of the wage earner and sends it to the collector for the Treasury.
  • Wage earners who are paid a salary for seafarer's work on an Icelandic vessel or on a vessel operated by an Icelandic shipping company enjoy an additional special allowance referred to as seamen's allowance.
  • The municipal income tax that wage earners pay on their salaries is one of the income bases of the municipalities. The percentage differs between municipalities.
  • When calculating the amount of municipal income tax, the average municipal income tax of all the municipalities is taken into account.
  • Everyone between the ages of 16 and 70 who has an income that exceeds the tax-free limit pays a fee into the construction fund for the elderly. This fee is a poll tax, i.e. at tax that is levied equally on everyone.
  • Children younger than 16 have a separate tax-free limit, and pay a tax of 6% on income that exceeds the tax-free limit.

Tax returns

  • Tax returns must be submitted to the Regional Tax Director in March every year. Tax returns provide information on income, assets and debts from the previous year.
  • In general, tax returns are submitted electronically, although if this is not possible, the tax return may be submitted on paper.
  • On August 1st, individuals receive collection and tax assessment slips from the Regional Tax Directors. These contain information on tax settlement.
  • If the tax payer has paid too much in taxes, a refund will be paid. If too little has been paid in taxes, the tax payer must pay the difference.

Other taxes

  • Individuals pay a 22% tax on capital gains.
  • Capital gains include:
  • Interest income
  • Dividends
  • Sales profits
  • Rental income
  • At the close of 2005 property tax was discontinued.
  • Inheritance tax is 10%, although no tax is paid on the first one and a half million of the tax base of the estate of a deceased person.
  • Some lottery winnings are taxable. A list of lotteries that pay tax-free winnings is published in the guidelines accompanying the tax return forms for individuals.

Links of interest

Laws and regulations