The start of the year brought a handful of real tax changes that affect most people living and working in Iceland. Everyone’s situation is different, of course, but the following breakdown covers the adjustments most likely to show up in your pocket.
Overview of Recent Tax Changes
In 2024, the Treasury directed 15.2 billion ISK toward local governments. Four of the resulting changes stand out as especially 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 — the first change to this figure since 2014. Children under 16 pay 6% on any income above that limit, and tax liability kicks in at age 16.
How does this affect you? If your child earns more than 300,000 ISK in a year, they’ll owe 6% on everything above that threshold.
Abolishment of National Tax Bracket Transfers for Couples
Roughly 29,000 people — about 9% of the population over 16 — are touched by this one. Married couples and cohabitants can no longer shift income between each other to land in a lower tax bracket. The change moves 33.3 billion ISK out of the taxable income pool, cutting overall tax payments by 2.8 billion ISK.
How does this affect you? If you out-earn your partner, that option to transfer part of your income and drop a bracket is gone. Someone who previously slipped from the top bracket (46.29%) down to the middle bracket (37.99%) through a transfer can no longer do that.
Increased Tax on Rental Income
Two changes to capital gains tax came into force at the same time. The exemption threshold for individuals renting out residential property has been cut from 50% to 25%, pushing the effective tax on rental income from 11% up to 16.5%.
How does this affect you? Landlords will simply pay more. Short-term rentals aimed at tourists are still tax-exempt, provided total income stays under 2 million ISK per year and the property is rented for no more than 90 nights.
Repeal of Authority to Utilize Personal Discount on Capital Income
Previously, if you weren’t using your full personal allowance against wage income, you could apply the unused portion against capital gains tax. That option has been removed.
How does this affect you? Anyone paying capital gains tax without fully using their personal allowance will notice this. Capital gains tax covers various non-wage income sources — dividends and rental income among them.
Understanding Your Tax Burden
Your tax percentages themselves haven’t changed. There will be no rate changes in 2026 either, but the income thresholds will rise, meaning you’ll need to earn more before crossing into the higher 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 as well. The monthly amount rises to 72,492 ISK in 2026, up 3,801 ISK from the previous year.
Additional Taxes
Several other taxes have gone up alongside these headline changes. The radio fee climbed from 21,400 ISK to 22,200 ISK, and contributions to the Executive Fund for the Elderly will also increase.
One bigger structural shift is the introduction of a kilometer fee, which replaces the old oil and petrol taxes. The fee is calculated on distance driven rather than fuel used — a response to the growing number of electric vehicles and a desire for a fairer way to fund road maintenance.
How does this affect you? Only vehicle owners pay it. The rate is 6.95 ISK per kilometer for vehicles weighing up to 3.5 tons, so someone driving 10,000 kilometers a year is looking at roughly 69,500 ISK in fees.
Final Thoughts
One deadline worth marking: vehicle mileage must be registered with Ísland.is by January 20. Miss the April 1 follow-up deadline and you’re facing a 20,000 ISK penalty.
As required by law, taxes on alcohol, tobacco, and nicotine rise annually — so prices for those products will be higher again this year.
It’s worth taking stock of how these changes sit with your own finances as you plan through 2024 and beyond.
