Tax on wages and pensions

Tax is deducted from your salary and pension each time you receive a payment.

Your employer, or the person or organisation paying your pension, deducts the tax from each payment and pays it to the state. This is called withholding tax.

Salary does not only mean your regular monthly pay. It also includes additional payments and benefits in kind, such as clothing, goods, the use of a vehicle and other benefits.

Learn more about payments to individuals and how they are taxed, including benefits in kind and different types of grants.

Calculating Withholding Tax

Tax on salary and pension payments is calculated after deductions such as pension fund contributions and private pension savings have been made.

The personal tax credit is a fixed amount deducted from the tax you pay each month. Any personal tax credit you do not use accumulates during the year. Spouses and cohabiting partners can also use each other’s personal tax credit.

Learn more about personal tax credit and income tax brackets, including the tax rates for each bracket and how to make the best use of your personal tax credit.

Income Tax and Municipal Income Tax

Tax on salary and pension payments consists of two parts:

• Income tax is paid to the state. It is divided into three tax brackets, with higher rates applying as income increases.

• Municipal income tax is paid to the municipality where you live.

Municipal income tax rates vary between municipalities. Withholding tax is calculated using the average municipal income tax rate for the whole country. As a result, the amount of municipal income tax you owe may change when your final tax assessment is calculated.

If you move between municipalities during the year, the municipal income tax is divided between them based on how long you lived in each municipality.

You can find municipal income tax rates on the website of the Icelandic Association of Local Authorities.

Final Tax Assessment After Filing a Tax Return

Withholding tax is a provisional tax payment.

Your taxes for the year are settled after you file your tax return. This is called the final tax assessment. It determines whether you are entitled to a refund from Iceland Revenue and Customs or have tax to pay.

Learn more about tax returns and the final tax assessment.