Personal tax credit: what it is and how to use it

How the credit works

Skatturinn calculates income and municipal tax on the taxable base by bracket and then deducts the personal tax credit from the tax. If the tax is lower than the credit, no withholding is due; the remainder of the credit cannot be used against anything other than income and municipal tax.

The tax-free threshold, the income that carries no withholding, is around 230,000 ISK of monthly taxable base in 2026 (72,492 / 0.3149). With the 4% pension contribution that corresponds to roughly 240,000 ISK of salary.

Who is entitled

Every individual who is taxable in Iceland and has reached the age of 16. People resident in Iceland for part of the year receive a proportional credit. There is one credit per person regardless of whether the income is salary, calculated remuneration, pension or benefits.

Splitting between employers

The credit is applied in withholding by the employer you authorise. You can:

• use it in full with one employer,
• split it, for example 60% with an employer and 40% in your own business,
• or not use it in withholding and receive it at assessment.

If more than one employer applies the full credit for the same month you underpay withholding and receive a bill at assessment. For a self-employed person with another salaried job, the usual arrangement is that the main employer uses the credit and calculated remuneration is taxed without it.

Accumulation within the year

Unused credit from earlier months of the same year accumulates and can be used against tax in later months with the same employer. This matters for contractors with uneven income: months without calculated remuneration build up credit that is used when income arrives. Credit unused at year end is not carried into the next year but is settled at assessment.

Transfer between spouses

Spouses and registered partners taxed jointly can use each other's unused credit. All unused credit may be transferred. This is done in withholding with the employer's authorisation or at assessment through the tax return.

The credit and calculated remuneration

In your own business the credit is deducted from withholding on calculated remuneration on the monthly return. In Payroll you set how much of the credit is used (100%, a share or 0%) and Fustle calculates the withholding accordingly. The payroll calculator shows the effect of using the credit or not.

Changes between years

The credit rises each year under the Income Tax Act and is published by Skatturinn in December. In 2026 it is 72,492 ISK per month. Older figures apply to older tax years; see figures for the current year.