Finances & 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 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 June 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.
Individuals pay a 22% tax on capital gains.
Capital gains include:
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.