Workers are subject to state and municipal income taxes. The tax is calculated on the basis of employment income and certain benefits in kind, after deducting pension premiums. Employers are obliged to deduct taxes from their workers.
Income tax and municipal tax are withheld by the employer and forwarded every month to the local tax authority. Final assessment takes place on the basis of the tax return by July 31st of the year following the tax year. The tax year is the calendar year.
Personal tax credit
Workers are entitled to a personal tax credit against the computed income tax. To be eligible for the tax credit the worker must apply for a tax card. If he does not, the tax is deducted in full and regulated but refunded in August the following year. The monthly personal tax credit is transferable between months within the calendar year but not between years. It is also 100% transferable between spouses.
Social security contributions
Employers pay monthly social security contributions on all remuneration paid for dependent personal services and presumptive employment income of the self-employed.
For further information on tax issues in Iceland, please contact the Internal Revenue Directorate (RSK) or local tax authorities.
