Tax brackets and personal allowance

If you have salary that are taxable in Iceland, your employer must withold tax every time he pays out the salary. As from January 1st 2016, Iceland no longer issues tax cards showing what tax bracket employers shall use. Instead you  have to inform your employer what bracket he should use when he calculate the taxes, if not the lowest one, to be sure that the witholding taxes from your salary is correct.

What is a personal tax credit?

Personal tax credit is an annual amount that is divided down to the 12 month of the calender year and is used to deduct the tax of salary or benefit´s.

The right to personal tax credit generally follows legal residence in Iceland, but there are some exceptions.

If the personal tax credit is not fully used in one of the months, it is allowed to use it in the next month or later within the calender year. Couples can share the tax credit between them. Unused tax credit can not be transferred to the next calender year.

Those that come to Iceland for a temporary stay and do not move their domicile to Iceland, are entitled to personal tax credit from taxes of their salary during their stay in the country. In such cases, the tax credit is a fixed amount pr. day.

You must yourself inform your employer about wether you are entitled  to use a personal tax credit to deduct the calculated taxes of your salary, and if he should use a full monthly credit og only a portion, in case you have more than one employer. If you have a cumulative personal tax credit or want to use your spouse´s personal tax credit, you must inform your employer about it.

Payroll withholding tax on work performed in another Nordic country, and transfer of tax (the Nordic treaty on payment and transfer of tax)

If you work for an employer in your country of residence but are going to perform work in another Nordic country, you or your employer must submit either form NT 1 or form NT 2 to the tax office where your employer is resident. This will ensure that your tax is deducted in the correct country. If you are liable to tax in your country of residence (i.e. if you stay for less than 183 days in the country of work), you should complete form NT 1. If you are liable to tax in the country of work, you should complete form NT 2. This applies if you stay there for more than 183 days, if your employer has a permanent establishment there, and (in some countries) if you are hired-out personnel.

In certain cases the Nordic treaty on payment and transfer of tax allows the tax authorities to transfer tax between countries. If tax has been withheld from your income from employment in one Nordic country and the same income proves to be taxable in another Nordic country, the tax that has been withheld can be transferred to the country in which the tax is payable. Any tax transferred pursuant to this treaty is always deemed to have been paid on time, so you will not be charged interest etc. on the amount transferred. However, if the amount paid is insufficient to cover the tax payable to the other country, you  will have to pay the excess tax yourself, plus any interest due on that amount .