Iceland

Abstract

This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions and payroll taxes paid by their employers. Results reported include the marginal and average tax burden for eight different family types.

Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.

    

The national currency is the Króna (plural: Krónur) (ISK). In 2021, ISK 126.9 were equal to USD 1. That year, the average worker is expected to earn ISK 10 103 366 (Secretariat estimate).1

1. Personal Income Tax System

1.1. Central government income taxes

1.1.1. Tax unit

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

1.1.2. Tax allowances and credits

1.1.2.1. Standard reliefs

• Basic tax credit: A fixed tax credit, amounting to ISK 609 509 in 2021, 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.

1.1.2.2. Main non-standard tax reliefs applicable to an AW

• 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 2021 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 5 000 000 for a single individual and a single parent and ISK 8 000 000 for a couple and are eliminated altogether at a 60% higher amount, or ISK 8 000 000 and 12 800 000, respectively. (These amounts are based on income in the year 2021 but are paid out in 2022).

1.1.3. Tax schedule

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 2021 is 17.0% for income up to ISK 349 018 per month. The tax rate is 23.5% for income ISK 349 018 to ISK 979 847. For income exceeding ISK 979 847 the tax rate is 31.8%. Tax relief is provided by the basic credit described in Section 1.1.2.1. As a result of the basic credit, personal income is free of income tax for personal income up to ISK 168 230 per month (ISK 2 018 775 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 broadcast media: 16 to 70 year-old individuals with taxable income over ISK 1 938 025 for the year are subject to a fixed tax of ISK 18 800 in 2021, which will be collected in 2022.

1.2. Local government income tax

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 2020 is 14.45%.

2. Compulsory Social Security Contributions to Schemes Operated Within the Government Sector

2.1. Employees’ contributions

Fee to the Retiree Investment Fund: 16 to 70 year-old individuals are subject to a fixed tax of ISK 12 334 in 2021, provided the individual's taxable income is at least ISK 1 938 025 for the year. This tax will be collected in 2022.

2.2. Employers’ contributions

Employers pay a social security tax on total wages of 6.0%. 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.

3. Universal Cash Transfers

3.1. Marital status related transfers

None.

3.2. Transfers for dependent children

Child benefits are granted for each child, subject to income thresholds. In 2021 they are as follows (in ISK per year):

• For each child under the age of seven: 148 000

• Children under the age of eighteen at the end of 2021:

  • First child: 248 000

  • Each additional child: 295 000

• Benefits for single parents:

  • First child: 413 000

  • Each additional child: 423 000

• Income threshold for benefit curtailment:

  • For couples: 9 098 000

  • For a single parent: 4 549 000

• 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%

  • An additional 1.5% is deducted for income above a threshold of 6 160 000 for single parents and 12 320 000 for couples (not applicable for the curtailment of supplemental benefit for children under the age of seven).

A special child benefit supplement was added in 2020 in response to the Covid crisis and extended in the year 2021, although changed from previous year. Benefits are granted for each child but only to households where other child benefits are not fully curtailed by income thresholds. This special child benefit supplement will not be extended past 2021 (see also section 4.7).

• For each child:

  • If households receive other child benefits: 30 000

Note that child benefits in this Report are based on income in the year 2021 but are paid out in 2022 (see also section 4.4).

4. Main Changes in the Tax/Benefit System Since 1998

4.1. The deductibility of the payment to pension funds

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.

4.2. Central and local income tax rates in 1997-2020

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 2021 are 17.0% for income up to ISK 349 018 per month, 23.5% for income exceeding that up to ISK 979 847 and 31.8% for income higher than ISK 979 847; 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:

	Central government general tax rate (%)	Municipal tax rate (%)	Total tax rate (%)	Central government surtax (%)
1998	27.41	11.61	39.02	7.00
1999	26.41	11.93	38.34	7.00
2000	26.41	11.96	38.37	7.00
2001	26.08	12.68	38.76	7.00
2002	25.75	12.79	38.54	7.00
2003	25.75	12.80	38.55	5.00
2004	25.75	12.83	38.58	4.00
2005	24.75	12.98	37.73	2.00
2006	23.75	12.97	36.72	0
2007	22.75	12.97	35.72	0
2008	22.75	12.97	35.72	0
2009	24.10	13.10	37.20	0
2010	24.10	13.12	37.32	2.90/6.00
2011	22.90	14.41	37.31	2.90/6.00
2012	22.90	14.44	37.34	2.90/6.00
2013	22.90	14.42	37.32	2.90/6.00
2014	22.86	14.44	37.30	2.44/6.50
2015	22.86	14.44	37.30	2.44/6.50
2016	22.68	14.45	37.13	1.22/7.90
2017	22.5	14.44	36.94	9.3
2018	22.5	14.44	36.94	9.3
2019	22.5	14.44	36.94	9.3
2020	20.6	14.44	35,04	2.15/9,05
2021	17.0	14.45	31.45	6.5/8.3

4.3. A special tax on higher income

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.

4.4. A revision of child benefit system

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 2012–2021, benefits are as follows (in ISK per year):

	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
For all children under the age of seven	100 000	100 000	115 825	119 300	122 879	133 300	140 000	140 000	140 000	148 000
Children under the age of eighteen:
First child	167 564	167 564	194 081	199 839	205 834	223 300	234 500	234 500	234 500	248 000
Each additional child	199 455	199 455	231 019	237 949	245 087	265 900	279 200	279 200	279 200	295 000
Benefits for single parents:
First child	279 087	279 087	323 253	332 950	342 939	372 100	390 700	390 700	390 700	413 000
Each additional child	286 288	286 288	331 593	341 541	351 787	381 700	400 800	400 800	400 800	423 000
Income threshold for benefit curtailment:
For couples	4 800 000	4 800 000	4 800 000	4 800 000	5 400 000	5 800 000	7 200 000 / 11 000 000	7 800 000 / 11 000 000	8 424 000 / 11 000 000	9 098 000 / 12 320 000
For a single parent	2 400 000	2 400 000	2 400 000	2 400 000	2 700 000	2 900 000	3 600 000 / 5 500 000	3 900 000 / 5 500 000	4 212 000 / 5 500 000	4 549 000 / 6 160 000
Curtailment of benefits under the age of seven:
For each child	3%	3%	4%	4%	4%	4%	4%	4%	4%	4%
Curtailment of benefits under the age of eighteen:
For one child	3%	3%	4%	4%	4%	4%	4% / 5.5%	4% / 5.5%	4% / 5.5%	4% / 5.5%
For two children	5%	5%	6%	6%	6%	6%	6% / 7.5%	6% / 7.5%	6% / 7.5%	6& / 7.5%
For three children or more	7%	7%	8%	8%	8%	8%	8% / 9.5%	8% / 9.5%	8% / 9.5%	8% / 9.5%

4.5. A revision of interest rebates

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; see section 1.1.2.2.

4.6. Transferability of basic tax credit between spouses

The basic tax credit was made transferable between spouses in stages; see section 1.1.2.1. above. In fiscal year 2001, 90% of the credit became transferable, rising to 95% in 2002 and 100% in 2003.

4.7. Changes to labour taxation due to the COVID pandemic in 2020 and 2021

Changes in 2020

A special child benefit supplement was added in 2020 in response to the Covid crisis. Benefits are granted for each child, but the amount is subject to whether other child benefits were fully curtailed by income thresholds. This special child benefit supplement will only be paid out in 2020.

• For each child:

  • If households receive other child benefits: ISK 42 000

  • If other child benefits are fully curtailed: ISK 30 000

Note that as regular child benefits in this Report, this one-off special child benefit supplement is based on income in the year 2019 but paid out in 2020.

A payment deferral scheme was introduced for monthly pay-as-you-go payments of withheld central and local PIT and social security contributions on previous month wages. Employers may defer 50% of the payable amount in March 2020. Employers hard-hit by COVID-19 may also defer 100% of the monthly payable amount up to three times in the nine-month period April-December 2020. Deferred amounts are due for payment in January 2021.

Changes in 2021

The special child benefit supplement was extended to 2021, although amended. In 2021 benefits are only granted to households already receiving other child benefits and are granted for each child. This special child benefit supplement will only be paid out in 2021.

• For each child:

  • If households receive other child benefits: ISK 30 000

Note that as regular child benefits in this Report, this one-off special child benefit supplement is based on income in the year 2020 but paid out in 2021.

A payment deferral scheme was also introduced in 2021 for monthly pay-as-you-go payments of withheld central and local PIT and social security contributions on previous month wages. Employers who postponed payments in 2020 and suffered significant loss of income in 2020 compared to earlier operating years, can request further postponement of the payments previously postponed until June, July and August 2021. Employers meeting the same criteria may also defer 100% of the monthly payable amount up to two times in 2021. Deferred amounts are due for payment in January 2022.

5. Memorandum Items

5.1. Identification of AW (only eight categories) and valuation of earnings

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.

5.2. Employer contributions to private pension funds, health and related schemes

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.

2021 Parameter values

Average earnings/yr	Ave_earn	10 103 366	Secretariat estimate
Pension rate for tax allowance	pension_rate	0.04
Tax credit	Basic_crd	609 509
	Married_propn	1
Central income tax	tax_sch	0.17	4 188 216
		0.235	11 758 164
		0.3180
Broadcast fee	broadcast_fee	18 800
Special tax	special_rate
threshold	special_thrsh
Local tax	local_rate	0.1445
Church tax	church_tax	0
Social Security Contr.	SSC_fixed	12334
	SSC_thrsh	1 870 828
Employer SSC	SSC_empr	0.061
General child allowance:
child allowance	CA	140 000
Maximum number of children under 7	max_child_under7	1
Supplement child allowance:
Married couple case
first child	SA_first_m	248 00
other children	SA_others_m	295 000
income threshold	SA_tresh_m	9 9 098 000
	SA_thresh_m_2	12 320 000
Single parent case
first child	SA_first_s	413 000
other children	SA_others_s	423 000
income threshold	SA_tresh_s	4 549 000
	SA_thresh_s_2	6 160 000
reduction rate (one child)	SA_redn_1	0.04
reduction rate (two children)	SA_redn_2	0.06
reduction rate (tree or more children)	SA_redn_3	0.08
additional reduction rate (for higher income)	SA_redn_4	0.015
Special child benefit supplement:
Households receiving other child benefits	SCBS_high	30 000
Households not receiving other child benefits	SCBS_low	0

2021 Tax equations

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.

	Line in country table and intermediate steps	Variable name	Range	Equation
1.	Earnings	earn
2.	Allowances:	tax_al	B	earn*pension_rate
3.	Credits in taxable income	taxbl_cr	B	0
4.	CG taxable income	tax_inc	B	earn-tax_al
5.	CG tax before credits	CG_tax_excl	B	tax(tax_inc, tax_sch)
6.	Tax credits :	tax_cr	P	MIN(CG_tax_excl_princ,Basic_crd+MAX(Married*Basic_crd-CG_tax_excl_spouse-(tax_inc_spouse*local_rate),0))
			S	MIN(Married*Basic_crd, CG_tax_excl_spouse)
	Broadcast fee		B	broadcast_fee*(earn>SSC_thrsh)
		special_tax	J	0
7.	CG tax	CG_tax	B	CG_tax_excl-tax_cr+special_tax+Broadcast fee
8.	State and local taxes	local_tax	P S	MAX(tax_inc_princ*local_rate-MAX(Basic_crd+ Max(Married*Basic_crd-CG_tax_excl_spouse-(tax_inc_spouse*local_rate),0)-CG_tax_excl_princ,0),0) MAX(tax_inc_spouse*local_rate-MAX(Married*Basic_crd-CG_tax_excl_spouse,0),0)
9.	Employees' soc security	SSC	B	SSC_fixed*(earn>SSC_thrsh)
11.	Cash transfers:
	Total family income	inc_tot	J	earn_total
	Child allowance	cash_trans	J	IF(Children = 0, 0, IF(AND(Married = 1, Children = 1),SA_first_m - MAX(0, (EARN*(1-pension_rate)) - SA_thresh_m) * SA_redn_1 - (MAX(0, (EARN*(1-pension_rate)) - SA_thresh_m_2) * SA_redn_4) + ((CA * max_child_under7) - MAX(0, (EARN*(1-pension_rate)) - SA_thresh_m) * SA_redn_1), IF(AND(Married = 1, Children = 2), (SA_first_m + SA_others_m) - (MAX(0, (EARN*(1-pension_rate)) - SA_thresh_m) * SA_redn_2) - (MAX(0, (EARN*(1-pension_rate)) - SA_thresh_m_2) * SA_redn_4) + MAX(0, ((CA *max_child_under7) - MAX(0, (EARN * (1 - pension_rate)) - SA_thresh_m) *SA_redn_1)), IF(AND(Married = 0, Children =1), SA_first_s - MAX(0, (EARN*(1-pension_rate)) - SA_thresh_s) * SA_redn_1 - (MAX(0, (EARN*(1-pension_rate)) - SA_thresh_s_2) * SA_redn_4) + ((CA * max_child_under7) - MAX(0, (EARN*(1-pension_rate)) - SA_thresh_s) * SA_redn_1), IF(AND(Married = 0, Children = 2), (SA_first_s + SA_others_s) - (MAX(0, (EARN*(1-pension_rate)) - SA_thresh_s) * SA_redn_2) - (MAX(0, (EARN*(1-pension_rate)) - SA_thresh_s_2) * SA_redn_4) + MAX(0, ((CA * max_child_under7) - MAX(0, (EARN * (1 - pension_rate)) - SA_thresh_s) * SA_redn_1)), 0 )))))
12.	Special child benefit supplement	SCBS	J	IF(Children>0;IF(AY10>0;SCBS_high*Children;SCBS_low*Children);0)
13.	Employer's soc security	SSC_empr	B	earn*SSC_empr_rate
Key to range of equation B calculated separately for both principal earner and spouse P calculated for principal only (value taken as 0 for spouse calculation) J calculated once only on a joint basis.

Note

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