At the start of the year, several significant tax changes took effect, directly impacting individuals across the board. While everyone’s situation is unique, here’s a concise overview of the most noteworthy adjustments.
Overview of Recent Tax Changes
In 2024, the Treasury allocated a substantial 15.2 billion ISK toward local governments. Below, we examine four key changes that are particularly relevant to individual taxpayers.
Exemption Limit for Children Increased
The income exemption limit for children under 16 has been raised from 180,000 ISK to 300,000 ISK—marking the first adjustment since 2014. Children may start paying tax at 16, but those under this age are required to pay 6% on income exceeding the exemption limit.
How does this affect you? If your child earns over 300,000 ISK annually, they will incur a 6% tax on any income above this threshold.
Abolishment of National Tax Bracket Transfers for Couples
This change impacts approximately 29,000 individuals—about 9% of the population over 16. Essentially, married couples and cohabitants can no longer transfer income between each other to navigate tax brackets. This modification has resulted in a shift of 33.3 billion ISK from the taxable income pool, reducing overall tax payments by 2.8 billion ISK.
How does this affect you? If you earn more than your partner, you can no longer transfer a portion of your income to lower your tax bracket. For instance, this change could prevent someone in the top bracket (46.29%) from moving down to the middle bracket (37.99%).
Increased Tax on Rental Income
Two significant adjustments to the capital gains tax also took effect recently. Notably, the exemption threshold for individuals earning rental income from residential properties has diminished from 50% to 25%. Consequently, the tax burden on rental income will rise from 11% to 16.5%.
How does this affect you? If you rent out property, you can expect to pay more in taxes on your rental income. Short-term rentals, such as those geared toward tourists, remain exempt from taxes if total income doesn’t exceed 2 million ISK per year and rentals are limited to 90 nights.
Repeal of Authority to Utilize Personal Discount on Capital Income
Last year, taxpayers could apply unused personal allowances against capital gains tax. This provision has now been revoked.
How does this affect you? Those subject to capital gains tax but not maximizing their personal allowance will feel this modification. Capital gains tax applies to various non-wage income sources, including dividends and rental income.
Understanding Your Tax Burden
While you may see higher gross pay, your tax percentage remains unchanged. The tax structure will see no percentage alterations in 2026, but the thresholds will rise. Consequently, a greater income will be required to remain in lower tax tiers.
Below is a summary of the income tax structure:
- First Tier: 31.49% of income
- Middle Tier: 37.99% of earnings
- High Tier: 46.29% of income
Personal discounts have been adjusted too, with the monthly amount rising to 72,492 ISK in 2026—an increase of 3,801 ISK from the previous year.
Additional Taxes
In tandem with these changes, various other taxes have increased. For instance, the radio fee has risen from 21,400 ISK to 22,200 ISK, while contributions to the Executive Fund for the Elderly will increase as well.
One notable shift is the introduction of a kilometer fee, replacing traditional oil and petrol taxes. This fee is calculated based on kilometers driven rather than fuel consumption, a move prompted by the rise of electric vehicles and the demand for a more equitable road maintenance funding model.
How does this affect you? Only vehicle owners will feel the impact of this fee, which stands at 6.95 ISK per kilometer for vehicles weighing up to 3.5 tons. For those driving 10,000 kilometers annually, this could translate to a fee of approximately 69,500 ISK.
Final Thoughts
Lastly, it’s important to remember to register your vehicle’s mileage with Ísland.is by January 20. Failure to do so by April 1 could result in a 20,000 ISK penalty.
Additionally, as per legal requirements, taxes on alcohol, tobacco, and nicotine will see annual increases, leading to higher prices for consumers this year.
Stay informed and consider these changes as you plan for your finances in 2024 and beyond.
