The national currency is the Króna (plural: Krónur) (ISK). In 2023, ISK 136.24were equal to USD 1. That year, the average worker is expected to earn ISK 11 066 502 (Secretariat estimate).1

Income is taxed on an individual basis, except for capital income of married couples which is taxed jointly.

  • Basic tax credit: A fixed tax credit, amounting to ISK 715 981in 2023, is granted to all individuals 16 years and older, regardless of their marital status. The tax credit is deducted from levied central and local government taxes. Unutilised tax credits or portions thereof are wastable, i.e., non-refundable, and non-transferable between tax years.

  • Standard marital status relief: Married couples and civil partners may utilise up to 100% of each spouses’ unutilised portion of his/her basic tax credit. Joint taxation also allows for bracket sharing between partners. If one partner has income in the highest tax bracket while the other’s income falls below the top bracket, one-half of the latter’s unused second bracket amount can be transferred to the high-income partner, up to a limit equal to half the second bracket. This transfer is then taxed at a rate lower than the top tax rate.

  • Relief(s) for children: None.

  • Relief(s) for compulsory pension contributions: The compulsory payment to pension funds amounts to 4% of wages and is deductible. In addition, an optional payment of up to 4% of wages may also be deducted. As the additional 4% contribution is optional, it is viewed as a non-standard relief in this Report.

  • Interest payment relief: A fully refundable tax credit is granted to purchasers of personal dwellings (homes) to recuperate a part of mortgage-related interest expenses. The maximum tax related interest credit in 2022 is ISK 420 000 for a single person, ISK 525 000 for a single parent and ISK 630 000 for a married couple. The following constraints apply to interest rebates: (1) they cannot exceed 7.0% of the remaining debt balance incurred in buying a home for one’s own use. (2) The maximum amount of interest payments that qualify for an interest rebate calculation is ISK 840 000 for an individual, ISK 1 050 000 for a single parent and ISK 1 260 000 for a couple. (3) 8.5% of taxable income is subtracted from the interest expense. (4) The rebates begin to be curtailed at a net worth threshold of ISK 7 500 000 for a single individual and a single parent and ISK 12 000 000 for a couple and are eliminated altogether at a 60% higher amount, or ISK 12 000 000 and 19 200 000, respectively. (These amounts are based on income in the year 2022 but are paid out in 2023).

The income tax base is composed of personal income (e.g. wages, salaries, fringe benefits, pensions, etc.), which is taxed on an individual basis, and capital income which is taxed jointly for married couples.

The tax on personal income is triple rated. The central government income tax rate in 2023 is 16.78% for income up to ISK 409 986 per month. The tax rate is 23.28 % for income ISK 409 987 to ISK 1 151 012. For income exceeding ISK 1 151 012 the tax rate is 31.58%. Tax relief is provided by the basic credit described in Section As a result of the basic credit, personal income is free of income tax for personal income up to ISK 178 577 per month (ISK 2 142 929 per year), when accounting for the deductible, compulsory pension payments.

The tax on capital income is 22%. It is levied on all capital income of individuals, such as interest, dividends, rents etc. Interest income up to ISK 300 000 per year and 50% of income from long-term rent of a maximum of two residential properties is tax free.

Fee to the national broadcast media: 16- to 70-year-old individuals with taxable income over ISK 2 276 569 for the year are subject to a fixed tax of ISK 20 900 in 2023, which will be collected in 2024.

The local government income tax base is the same as the central government’s personal income tax base.

The local governments’ income tax is single rated, but the rate varies between 12.44% and 14.52% between municipalities. The weighted average rate in 2023 is 14.67 %.

Fee to the Retiree Investment Fund: 16- to 70-year-old individuals are subject to a fixed tax of ISK 13 749 in 2023, provided the individual's taxable income is at least ISK 2 276 569 for the year. This tax will be collected in 2024.

Employers pay a social security tax on total wages of 6.25%. In addition, 0.65% is levied on the wages of fishermen as a premium for their government accident insurance. Other taxes, levied on the social security tax base, but based on other legislation, are the 0.05% Wage Guarantee Fund Fee and a payroll tax, the Promote Iceland Market Fee, also 0,05%. Furthermore, a new financial activities tax was introduced in 2012, which requires financial and insurance companies to pay an additional 5.5% payroll tax.


Child benefits are granted for each child, subject to income thresholds. In 2022 they are as follows (in ISK per year):

  • For each child under the age of seven: 138 000

  • Children under the age of eighteen at the end of 2022:

    • Each child: 295 000

  • Benefits for single parents:

    • Each child: 440 000

  • Income threshold for benefit curtailment:

    • For couples: 9 500 000

    • For a single parent: 4 750 000

  • Curtailment of benefits (children under the age of seven only):

    • For each child: 4%

  • Curtailment of benefits (all children under the age of eighteen):

    • For one child: 4%

    • For two children: 6%

    • For three children or more: 8%

Note that child benefits in this Report are based on income in the year 2022 but are paid out in 2023 (see also section 4.4).

All employees are required to participate in pension funds. The employee contribution is generally 4% of wages and the employer contribution was 6% and increased to 8% as of beginning 2007. On July 1st, 2016, the employer contribution increased to 8.5% and one year later it increased again to 10%. The employer contribution increased once again on July 1st, 2018, to 11.5%. Both contributions are deductible from income before tax. In some cases, the contributions of employees and employers are higher. An optional, additional payment from employees of up to 4% of wages is also deductible and goes into an individual retirement account. However, from 2012 to mid-2014, this additional payment was temporarily set at 2%.

This voluntary pension savings option was first introduced in 1999 in order to encourage personal saving. At the time the contribution rate was 2% for employees and 0.2% for employers. In May 2000 these rates were doubled to 4 and 0.4%, respectively, as noted above. In addition, some employers, such as the central government, have increased their employer counter-contribution by agreement with employees. The central government contributed 1% against a voluntary employee contribution of 4% in 2001 and 2% as of the beginning of 2002. All such contributions are tax-deductible, both with the employer and the employee at the time the contribution is made. The actual pension is taxed as personal income when it is drawn. As of the beginning of 2004, the employer option of deducting the above 0.4% against the social security tax was abolished. Since such employer counter-contributions had become part of wage agreements in most cases, it was no longer felt that such a tax incentive was needed.

In 1997–2007, the Government pursued a policy of reducing the marginal tax rate, as can be seen in the table below. This development was reversed in 2009 when income tax was raised by 1.35 percentage points in response to the Treasury’s rising debt burden brought on by the economic crisis. At the beginning of 2010, the tax system was changed from single rated to triple rated. The tax rate was set at 24.1% for the first monthly ISK 200 000 but it was raised by 2.9% for the next ISK 450 000 and again by 6% for income in excess of ISK 650 000. In 2017, the tax system was changed to double rated and in 2020 another tax bracket was added, changing it back to triple rated. The rates in 2023 are 16.78% for income up to ISK 409 986 per month, 23.28% for income exceeding that up to ISK 1 151 012 and 31.58% for income higher than ISK 1 151 012; see section 1.13 for further details. From 1998 onwards, the central government and average local government personal income tax rates have been as follows:

In 1998, the special tax on higher income was raised by 2 percentage points, from 5 to 7%. For 2003-income, it was reduced back to 5%. It was reduced to 4% for 2004 income and to 2% for 2005-income. In the fiscal year 2006, the tax was abolished. In the latter half of 2009 the special tax on higher income was introduced again at 8%. In 2010 the tax system changed to triple-rated and in 2017 it was changed to double rated. In 2020 a triple-rated tax system was reintroduced; see sections 4.2 and 1.1.3.

Child benefits are granted for each child, subject to income thresholds. The amendments to tax legislation that came into effect in 2004 included a schedule for raising child benefits. As from 2007, the child benefits will be paid for children up to 18 years old instead of 16 years old. For 2013–2022, benefits are as follows (in ISK per year):

In 2004, the interest rebate was cut by 10%, effective for that year only. The ceiling on interest payments that qualify for the interest rebate was reduced from 7% to 5.5% in 2005 and the interest rate cut was reduced from 10% to 5%. As of the beginning of 2006, the ceiling was further reduced to 5%. In 2005 and again in 2007 the net worth ceiling was lifted considerably in reaction to the increase in net worth due to the house price boom in 2005–2007. In 2008, as mortgage-related interest expenses surged, the ceiling on interest payments was raised back to 7% and the maximum rebate amount increased by 37%. These measures stayed in effect in 2009. In 2010 the maximum rebate amount increased by 47–62% and the net worth ceiling was reduced significantly. The rate of taxable income which is subtracted from the interest expense was increased from 6% to 8% and further to 8.5% in 2014. In addition to the ordinary interest payment relief, a temporary interest cost rebate was in effect in 2010–2011. In 2022 the net worth ceiling was raised by 50% for all households; see section

The basic tax credit was made transferable between spouses in stages; see section above. In fiscal year 2001, 90% of the credit became transferable, rising to 95% in 2002 and 100% in 2003.

The data on average earnings refers to average workers in eight categories according to the NACE rev. 2 classification which corresponds to the ISIC rev.4 system. The categories are C – Manufacturing, D – Electricity, gas, steam and air conditioning supply (from 2008), E – Water supply; sewerage, waste management and remediation activities (from 2008) F – Construction, G – Wholesale and retail trade, repair of motor vehicles, motorcycles, H – Transport, storage, and J – Information and communication K - Financial and insurance activities. Public sector employees are not included. Together, these categories comprise approximately 80% of Iceland’s private sector labour force.

The original data are obtained from a monthly survey among Icelandic firms with 10 or more employees.

By law, all employees and employers must contribute to pension funds. These funds are private and form the second pillar pension protection. The private pension funds are not part of the basic, first pillar, government-run social security system, to which a social security tax is paid as described under section 2.2 above. Compulsory and voluntary payments to such funds are described in section 4.1 above.

The equations for the Iceland system are mostly on an individual basis. But the tax credit for married couples is relevant only to the calculation for the principal earner and child benefit is calculated only once. This is shown by the Range indicator in the table below. The functions which are used in the equations (Taper, MIN, Tax etc) are described in the technical note about tax equations. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.


← 1. The definition of average worker in Iceland includes workers in five categories. See section 5.1.

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