Employer Tax Contributions

Tax Type	Rate	Base
Social Security Contribution	6.35% (general)	Employee's earnings
Mandatory Occupational Pension	11.5% (minimum employer contribution)	Employee's earnings
Rehabilitation Fund	0.1%	Employee's earnings

Filing & Compliance

• Employers must withhold income tax monthly via the PAYE system.
• Monthly wage reports and corresponding payments are due by the 15th of the month following the payroll period.
• Employers must submit an annual summary of wages paid and taxes withheld.

In Iceland, employee tax deductions encompass various areas, including income tax, municipal tax, pension contributions, and certain allowable expenses.

Income Tax

• Personal Tax Credit: A monthly deduction of 68,691 ISK (2025 figure) applicable to individuals 16 years or older residing in Iceland. This credit reduces the taxable income amount. Those turning 16 during the year receive the full credit. Employees must inform their employer about how they wish to apply this credit.
• Tax Brackets (2024 rates, pending 2025 update):
  • 31.49% for income up to 472,005 ISK monthly.
  • 37.99% for income between 472,005 and 1,325,127 ISK monthly.
  • 46.29% for income exceeding 1,325,127 ISK monthly. These rates include municipal tax.
• Municipal Tax: Averaged at 14.94% in 2024, this varies based on the municipality. It's included within the tax bracket percentages.

Pension Contributions

• Mandatory Contributions: Employers contribute a minimum of 11.5%, and employees contribute at least 4% of their monthly earnings, totaling 15.5% minimum.
• Private Pension Funds: Voluntary additional contributions of 2% by employers and 4% by employees are possible. Employers are obligated to contribute the additional 2% if an employee opts for a private pension scheme. Up to 8% of employee contributions to pension schemes are tax-exempt.

Other Deductions and Allowances

• Work-Related Expenses: Certain documented expenses can be deductible. For example, verified car operating costs, with a maximum deduction between 83 and 141 ISK per km, can be deducted from car allowances. The specific amount can fluctuate throughout the year.
• Per Diem Payments: These payments, designed to cover travel expenses outside the regular workplace, are generally not subject to withholding tax unless they surpass stipulated limits defined by the Internal Revenue Directorate. Employees can report deductions against these payments as per the Principal Tax Rates.
• Support for Dependents: Parents or guardians supporting dependent children between 16 and 21 who are students or have insufficient income may be eligible for tax reductions, unless the dependent's education qualifies for student loans.
• Special Circumstances: Tax reductions may be granted by the Internal Revenue Directorate in situations such as illness, accidents, old age, death, or a child's chronic illness. Documentation of expenses is necessary.
• Foreign Expert Tax Incentive: Foreign experts meeting specific conditions can have 75% of their income taxed for their first three years in Iceland. Applications, submitted to the Icelandic Centre for Research, are due within three months of starting work.

Tax Return and Assessment

• Annual Tax Return: Obligatory filing with the Icelandic Tax Authority (Skatturinn) happens every March, covering the previous year's income, assets, and liabilities.
• Tax Assessment: Takes place each June, resulting in refunds for overpayments or payment requests for underpayments. Outstanding amounts are divided into seven payments, deducted by employers from monthly wages.

Important Considerations

• Multiple Employers: Employees with more than one employer must inform each about all income sources to ensure correct withholding and personal tax credit usage. Salary exceeding specific thresholds with one employer affects withholding by the second employer, potentially triggering higher tax brackets.
• Joint Tax Filing: Married or registered partners can opt for joint filing, allowing the use of a non-working partner's tax credit if they have a child or can prove cohabitation for over a year. Both partners bear responsibility for the joint return.

This information is current as of February 5, 2025, and may be subject to change due to legal updates or revisions in tax regulations. Consulting official Icelandic tax resources or a tax advisor is recommended for precise information.