Payroll Services in Iceland
Fully managed Icelandic payroll – withholding at the 2026 brackets and personal tax credit, tryggingagjald and pension funds paid on time, and every collective agreement rate and bonus applied, with a named specialist a phone call away.
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What Icelandic payroll actually involves
Icelandic payroll has no statutory minimum wage and very few statutory amounts. Most of what an employer owes is set by collective agreements, which bind every employer in the occupation, member or not.
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Calculate Your Employee Costs in Iceland
Enter a gross annual salary to see the employer cost of an Icelandic employee: the 11.5% minimum employer pension contribution, 6.35% social security tax on salary and pension together, and the ISK 176,000 of December and holiday bonuses under the main collective agreements. Union fund contributions under the agreement, about 1.35%, are not included.
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*Indicative figures only and not definitive legal advice. Local regulations change frequently. Consult an expertIceland
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Employer Costs in Iceland Explained
An Icelandic employee costs about 18.6% on top of salary in statutory charges: 11.5% employer pension and 6.35% social security tax on salary and pension together. The fixed December and holiday bonuses add ISK 176,000 a year, so the total falls from about 21.9% at the lowest agreement wage to 19.6% at ISK 1.5 million a month. Collective agreements add union fund contributions of roughly 1.35%. There is no statutory severance, and parental leave is paid by the state. Here’s the breakdown.
Income tax is withheld at source every month and combines state tax with municipal tax. In 2026 the rate is 31.49% on monthly pay up to ISK 498,122, 37.99% up to ISK 1,398,450 and 46.29% above that. The municipal share is 14.94% on average. The rates are unchanged from 2025; the thresholds rose 5.5%.
Tax is calculated on pay after the employee’s pension contributions, and then reduced by the personal tax credit of ISK 72,492 a month, or ISK 869,898 a year. Unused credit carries forward within the year, can be split between employers, and can be used in full by a spouse. From 2026 married and cohabiting couples can no longer share the second and third brackets.
Withholding and the social security tax for a month fall due on the 1st of the following month, with a final deadline of the 15th. Late payment costs 1% a day, up to 10%, plus interest.
Foreign experts whose knowledge is scarce in Iceland can have 25% of their employment income exempted from tax for their first three years, if they were not resident in the previous five years and apply through Rannís within three months of starting. The social security tax is still charged on their full pay.
Every employee aged 16 to 70 must pay into a pension fund. The legal minimum is 15.5% of total pay: 4% from the employee and 11.5% from the employer. Up to 3.5 points of the employer’s share can go into a designated private account. On top of this, employees can save up to 4% in a voluntary private pension, deducted before tax, and most collective agreements oblige the employer to add 2% when they do. Contributions are due on the 10th of the month after the wage month, with a final deadline at the end of that month.
The social security tax, tryggingagjald, is 6.35% in 2026: 4.90% general contribution, 1.35% unemployment insurance, 0.05% wage guarantee fund and 0.05% market fee. It is charged on all taxable pay and benefits, including the employer’s pension contributions, which is why the combined employer cost is about 18.6% of salary rather than 17.85%.
Iceland has no statutory minimum wage. Under Act 55/1980 the wages and terms in collective agreements are the minimum for everyone working in that occupation, whether or not the employer or employee is a member. The current general agreements run from February 2024 to January 2028, with a 3.5% increase, at least ISK 23,750, on 1 January 2026. The lowest rate in the main SA–SGS wage table from April 2026 is ISK 476,379 a month for full-time work.
The main agreements also set two flat bonuses. The December bonus is ISK 114,000 in 2026 for a full-time employee and must be paid by 15 December; the holiday bonus is ISK 62,000. Both are pro-rated for part-time and part-year employees. Employers also pay contributions to union funds under the agreements, such as the sickness fund at 1% of pay and the holiday home fund at 0.25%.
Under Act 30/1987 employees earn two days of annual leave for each month worked, 24 working days a year, and holiday pay of at least 10.17% of all pay, overtime included. The holiday year runs from 1 May to 30 April. Collective agreements add days with seniority, up to 30.
Sick pay is an employer cost. The statutory minimum is two days for each month worked in the first year and one month on full pay after a year of service, and collective agreements improve on it – the VR agreement gives two months after one year and six months after ten.
Parental leave is six months for each parent, of which six weeks can be transferred. It is paid by the Parental Leave Fund, not the employer, at 80% of average pay up to ISK 900,000 a month from 1 January 2026.
Notice periods come from collective agreements. Under the general agreements they are one week in the first three months, one month after three months and three months after six months, ending at the end of a month, with longer periods for older employees with long service. There is no statutory severance pay in the private sector.
Citizens of the EEA and EFTA can work in Iceland without a permit, registering with Registers Iceland for an identity number if they stay longer than three months. Other nationals need a residence permit based on work and a work permit from the Directorate of Labour, which requires a signed contract; the permit fee is ISK 80,000 from 1 January 2026.
Icelandic employer contribution rates, 2026
| Contribution | Employer | Employee | Applies to |
|---|---|---|---|
| Pension fund (minimum) | 11.5% | 4% | Total pay, ages 16 to 70 |
| Voluntary private pension | 2% match | Up to 4% | Under most collective agreements |
| Social security tax (tryggingagjald) | 6.35% | — | All taxable pay, including employer pension |
| Withholding tax | — | 31.49% / 37.99% / 46.29% | Monthly pay after pension, less ISK 72,492 credit |
| Union funds | About 1.35% | — | Sickness fund 1%, holiday home fund 0.25%, VIRK 0.10% |
| December bonus | ISK 114,000 | — | Full-time, paid by 15 December |
| Holiday bonus | ISK 62,000 | — | Full-time |
| Statutory severance | None | — | Notice periods under collective agreements |
Monthly withholding at selected salaries, 2026
| Gross monthly salary | Pay after 4% pension | Tax after credit | Share of gross |
|---|---|---|---|
| ISK 476,379 | ISK 457,324 | ISK 71,519 | 15.01% |
| ISK 700,000 | ISK 672,000 | ISK 150,424 | 21.49% |
| ISK 1,000,000 | ISK 960,000 | ISK 259,834 | 25.98% |
| ISK 1,500,000 | ISK 1,440,000 | ISK 445,635 | 29.71% |
| ISK 2,500,000 | ISK 2,400,000 | ISK 890,019 | 35.60% |
Employer cost by monthly salary, 2026
| Monthly salary | Pension 11.5% a year | Social security tax a year | Bonuses with tax | Total a year | Share of salary |
|---|---|---|---|---|---|
| ISK 476,379 | ISK 657,403 | ISK 404,746 | ISK 187,176 | ISK 1,249,325 | 21.85% |
| ISK 700,000 | ISK 966,000 | ISK 594,741 | ISK 187,176 | ISK 1,747,917 | 20.81% |
| ISK 1,000,000 | ISK 1,380,000 | ISK 849,630 | ISK 187,176 | ISK 2,416,806 | 20.14% |
| ISK 1,500,000 | ISK 2,070,000 | ISK 1,274,445 | ISK 187,176 | ISK 3,531,621 | 19.62% |
Withholding assumes the employee’s 4% pension contribution only, the full personal tax credit and no voluntary pension. The cost table includes the December and holiday bonuses with social security tax on them, but not union fund contributions or pension on the bonuses. ISK 476,379 is the lowest rate in the SA–SGS wage table from April 2026. These are TopSource calculations from the verified 2026 rates.
Rates, thresholds, credits and agreement amounts shown are for 2026 and were verified on 16 September 2026. Tax brackets and the personal credit are indexed every January, and wage tables and bonuses follow the collective agreements in force until January 2028. This page is general information, not tax or legal advice.
How our Icelandic payroll service works
Why TopSource for Icelandic Payroll
TopSource for payroll, Employer of Record or any other of our services represents a simpler, more reliable and transparent option.
We don’t hide fees or sneak price increases. We run Icelandic payroll in-house and file under your own registration rather than a bureau’s, so the same team that files your withholding answers your calls. You get a named account manager, one consolidated monthly invoice covering salaries, pensions, taxes and fees, and one live Portico view of Iceland beside every other country we run for you. Portico syncs with your time-tracking, leave and HR systems via API – set up by our onboarding team, not left to yours. GDPR, SOC 2 and ISO 27001 certified.
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Icelandic payroll FAQs
Employers pay at least 11.5% of total pay to a pension fund and 6.35% social security tax, tryggingagjald, which is charged on salary plus the employer’s pension contribution. Together that is about 18.6% of salary. Collective agreements add union fund contributions of around 1.35% and fixed December and holiday bonuses of ISK 176,000 a year in 2026.
Tax is withheld at 31.49% on monthly pay up to ISK 498,122, 37.99% up to ISK 1,398,450 and 46.29% above that, including municipal tax at an average of 14.94%. Pay is calculated after the employee’s pension contributions, and the result is reduced by a personal tax credit of ISK 72,492 a month.
There is no statutory minimum wage. Under Act 55/1980 the wages in collective agreements are the minimum for everyone in the occupation, whether or not they are union members. The lowest rate in the main SA–SGS wage table from April 2026 is ISK 476,379 a month for full-time work.
The mandatory minimum is 15.5% of total pay for employees aged 16 to 70: 11.5% from the employer and 4% from the employee. Employees can also save up to 4% in a voluntary private pension before tax, and most collective agreements require the employer to add 2%. Contributions are due on the 10th of the following month.
Withholding tax and the social security tax for a month fall due on the 1st of the following month, with a final deadline of the 15th. Late payment attracts a penalty of 1% a day, up to 10%, plus interest. Pension contributions are due on the 10th, with a final deadline at the end of the month.
Under the main collective agreements, full-time employees receive a December bonus of ISK 114,000 in 2026, paid by 15 December, and a holiday bonus of ISK 62,000. Both are pro-rated for part-time and part-year employees, and both rise again in 2027 under the current agreements.
Under Act 30/1987 employees earn two days of annual leave for each month worked, 24 working days a year, with holiday pay of at least 10.17% of all pay including overtime. The holiday year runs from 1 May to 30 April, and collective agreements add days with seniority.
Parental leave is paid by the Parental Leave Fund, not the employer. Each parent is entitled to six months, with up to six weeks transferable to the other parent, paid at 80% of average pay up to ISK 900,000 a month from 1 January 2026.
Yes. Foreign experts whose skills are scarce in Iceland can have 25% of their employment income exempted from tax for their first three years, provided they were not resident in Iceland in the previous five years and apply through Rannís within three months of starting work. The social security tax is still charged on their full pay.
Notice periods are set by collective agreements. Under the general agreements they are one week during the first three months, one month after three months and three months after six months, ending at the end of a month, with longer notice for older employees with long service. There is no statutory severance pay in the private sector.
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