Tax on wages and pensions

All persons who are taxable in Iceland and have income above the tax-free threshold pay taxes on their wages, which go to the national common fund.

Tax on personal wages

Tax on personal wages is divided into income tax on the one hand to the state and on the other hand into municipal tax on the other.

The tax-free threshold takes account of the personal tax credit and the withholding rate, which is the threshold used before tax is paid on the wages.

The employer deducts the withholding from the wage of the employee and returns it to the collector of the Treasury.

Employees who work in more than one place must inform employers of other paid jobs in order to have the correct proportion of income tax deducted from wages.

The three tax brackets in 2024 are:

• 31.48% of income under 446,136 kr. per month

• 37.98% of income 446,136 - 1,252,501 kr. per month

• 46.28% of income above 1,252,501 kr. per month

Included in the tax bracket percentages is the municipality tax which varies by municipality. Withholding of municipal district tax is based on the average of all municipalities. In 2024, the municipalities tax is 14.93%.

Children under the age of 16 have a special income limit and pay 6% of income that exceeds the income limit in tax.

Tax return and assessment

Tax return

It is mandatory to file a tax return to Skatturinn - Revenue and Customs in March each year. In the tax return a person declares their income, assets and liabilities from the previous year.

After the tax return is filed the tax assessment takes place in the beginning of June each year. The tax assessment is a settlement of taxes and fees for the previous year.

Those who have paid too much in tax are refunded. If too little has been paid in tax, the remainder has to be paid.

Collection

The debt, after assessment, is divided to seven payments. Collection of debt is through the employers. They are sent a claim to deduct debt from the wages of each month. Those who are not employed or working independently are sent a payment form for collection of taxes after assessment.

Payment plan

A payment plan is a schedule for payment of taxes, fees and fines. The plan is made in order to lighten the payment burden and postpone collection measures. Thus, the payment schedule is not a contract for the reduction or cancellation of claims, but rather shows how claims due shall be paid by means of distribution of payments.

Further information on payment plans