The tax-system in Iceland




The tax-system in Iceland is very simple. Income tax is withheld by the employer. The amount withheld is calculated on the basis of employment income, including pensions and benefits in kind, after deducing pension premiums. The tax-system in Iceland is very simple:

  • Income tax rate
    There is a 35.72% tax on wages and salaries .

  • Dividends and interests
    There is a 10% tax on dividends and interests.

  • Personal tax credits
    All individual taxpayers are entitled to a personal tax credit against the computed income taxes on income. This credit amounts to ISK 385,800 for the year 2007 or ISK 32,150 for each month.

For the tax year 2007 the rate of withheld tax is 35,72%, i.e. 22,75% for income tax and 12,97% for municipal tax. The personal tax credit, ISK 32,150 pr. month, is deducted from the calculated tax.


This is how the tax-system in Iceland works in real life: 

When your salary is paid, you receive a pay slip showing the amounts withheld as tax, pension premiums etc. Do remember to keep your pay slips, they are evidence that the tax has been deducted. The employer is responsible for the deducted tax of your salary.

Example showing how tax is calculated in ISK:
Salary for one month:  200,000
4% deduction of pension premium: 8,000
Taxable income: 192,000
Tax rate 36,72 x 192.000: 68,582
Personal tax credit: 32,150
Withheld tax: 36,432
Net salary: 155,568

However, if the person is married and the spouse is not working and not using the personal tax credit, the person who is working gets a double tax credit. In that case, the net salary would be ISK 187,718



Income tax rate
The corporate income tax rate for income year 2007 is 18% for companies and 26% for partnerships registered as taxable entities.

Dividends and interests
Dividends and interests paid to resident companies are subject to withholding tax of 10%. Taxes withheld are credited against the assessed income tax.


Taxes on payroll

Social security contributions
Social security contribution (tryggingagjald) is imposed on all remuneration paid for dependent personal services and presumptive employment income of the self-employed. The contribution is inter alia used to finance the social security system.

For the income year 2007 the general rate is 5.340%, for employee from European Economic Area (EEA) withholding E-101, it is 0.158%, and for seamen it amounts to 5.990%.

Pension fund contributions

Contributions for occupational pension funds are imposed on all remuneration paid for dependent personal services and presumptive employment income of the self-employed. The general contribution is 8% of pre-tax remuneration, matched by a 4% contribution of the wage-earner. Most collective wage agreements on the labour market require employers to contribute an additional 2% to an occupational pension fund, if an employee chooses to pay an additional 2-4% contribution into a pension fund plan. However, if the employee has an E-101, the employer does not pay 12% (4+8) to the Icelandic pension fund.

According to the World Bank, the total tax rate for companies as % of profits in Iceland is 27.9, compared to 68.2 for France, 46.0 for USA, 35.4 for UK and 57.0 for Sweden.


Value Added Tax (VAT)

The general rate is 24.5% and the reduced rate is 7% (from 1 March 2007 on certain food, books, newspaperÂ…)

Source: Internal Revenue Directorate, World Bank


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