Personal tax credit and tax brackets for the elderly and pensioners

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Individuals who receive disability or pension payments from multiple pension funds and from the Social Insurance Administration must pay close attention to the use of their personal tax credit and ensure that tax is paid in the correct tax bracket. This also applies to foreign pension payments.

This is important to avoid a tax debt at the end of the year, which can arise if the personal tax credit limit is exceeded or if withholding tax is calculated in the wrong tax bracket

Overview of how my personal tax credit is used

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Personal tax credit

Personal tax credit fully used in one place

If payments from one source are usually higher than 230.000 ISK per month, it is best to use the full personal tax credit in that one place (rather than splitting it between others). This greatly reduces the risk of exceeding the personal tax credit limit.

Individuals with foreign income, such as payments from a foreign pension fund, must consider the proportion of their foreign income compared with their Icelandic income. See the example below.

Multiple lower payments

If no single payment usually exceeds 230.000 ISK per month, it may be better to divide the personal tax credit between places.

In such cases, you must inform each pension fund or institution how much of the personal tax credit may be used in each place.

The tax calculator can help you choose the most suitable use of the personal tax credit based on your income.

If the personal tax credit is not fully used during the year, this may result in a refund of tax paid when the income year has been settled. See further information on accumulated personal tax credit.

Tax brackets

How much tax you pay depends on your income. There are three tax brackets:

Tax Bracket	Income range	Tax percentage
Tax Bracket 1	0 - 498.122 ISK	31,49%
Tax Bracket 2	498.123 - 1.398.450 ISK	37,99%
Tax Bracket3	yfir 1.398.450 ISK	46,29%

If your monthly wages exceed 498.122 ISK with one employer, other employers must withhold tax on your wages at the next tax bracket. If your monthly wages exceed 1.398.450 ISK the portion that exceeds that limit is calculated in the third tax bracket.

Examples

Guðrún receives her pension payments from three different pension funds, in total 550,000 ISK per month. Firstly 350,000 ISK from pension fund A, secondly 150,000 ISK from pension fund B and thirdly from pension fund C 50,000 ISK.

What does Guðrún need to do?

She tells pension fund A to use all of her personal tax credit.
The first tax bracket is from 0 – 472,005 ISK and Guðrún therefore needs to inform pension fund B and C to calculate her withholding tax in tax bracket two fully or partially.
- A part of her payment from pension fund B can be calculated in tax bracket one, but the rest needs to be in tax bracket two.
- All her payments from pension fund C need to be calculated in tax bracket 2.

Employer	Amount	Tax bracket	Personal tax credit
Pension fund A	350,000 kr.	Tax bracket 1	Used at pension fund A
Pension fund B	150,000 kr.	Tax bracket 1 and 2
Pension fund C	50,000 kr.	Tax bracket 2

Sigrun lives in Iceland and gets payments from three different pension funds, total sum of 450,000 kr. per month. One payment from pension fund A 250,000 kr. a month, another from pension fund B 50,000 kr. a month. The third payment is from a foreign pension fund 150.000 kr. a month.

What does Sigrún need to do?

The personal tax credit is needs to be divided between the Icelandic and foreign income. Her total income from Iceland is 67% of the total. It would be best for Sigrún to use 67% of her personal tax credit at pension fund A. The 33% will be used later in the tax assessment towards the foreign income.
The income from pension fund A exceeds the limit for tax bracket 1. They need to calculate her income in tax bracket 1 and 2.
Pension fund B needs to calculate her income in tax bracket 2.
The income in the foreign pension fund will be calculated with her total income for the year in tax brackets 1 and 2.

Employer	Amount	Tax brackets	Personal tax credit
Pension fund A	250,000 kr.	Tax bracket 1 and 2	Use 67% with A
Pension fund B	50,000 kr.	Tax bracket 2
Foreign pension fund	150,000 kr.	Tax bracket 1 and 2	Use 33% in the final tax assessment.

Notification of exceeding the personal tax credit limit and tax debt at assessment

Notifications are regularly sent to individuals who have exceeded their personal tax credit limit and/or have paid withholding tax in the wrong tax bracket. Those who receive such notifications are not paying enough tax through withholding and are likely to end up with a tax debt at assessment if no action is taken.

A notification of overused personal tax credit is a warning, not a demand for payment.

It is important to take action and correct the use of the personal tax credit or have the tax bracket used for withholding adjusted.

More information on exceeding the personal tax credit limit.

Service provider

Skatturinn - Iceland Revenue and Customs

Related material

Personal tax credit and income tax brackets