Tax brackets 2026: how income tax is applied in steps

The 2026 brackets

The rate in each bracket is the sum of state income tax and the average municipal tax (útsvar). Withholding uses the average; at assessment your municipality's rate is applied and the difference settled.

Marginal and average tax

The marginal rate is the rate on the next króna. With a taxable income of 600,000 ISK the marginal rate is 37.99%, because the next króna lands in bracket 2. The average rate is total tax as a share of the base, after the credit:

It is a common misconception that a higher bracket "takes everything". It only applies to the krónur above the threshold.

Brackets apply to the person, not the employer

If you have income from more than one source, for example a salaried job and calculated remuneration in your own business, the brackets apply to the combined income. In withholding each employer calculates from the bottom unless you tell them otherwise, so withholding can fall short and the gap is collected at assessment. In the payroll calculator you can enter other salary in the same month so calculated remuneration lands in the right bracket.

What is in the base

Taxable income is salary or calculated remuneration less the 4% mandatory pension contribution and up to 4% additional pension savings. Mileage allowance and per diems within Skatturinn's limits are not in the base. Business profit beyond calculated remuneration is added to your income tax base in the return and taxed in the same brackets.

Capital income

Interest, dividends and capital gains are not in these brackets; they carry capital gains tax of 22%. For those running an ehf. this is why dividends and salary are taxed differently; Skatturinn nonetheless sets a minimum owner salary through the calculated-remuneration rules.

Example: a contractor with 900,000 ISK of calculated remuneration

1. Pension contribution 4% = 36,000 ISK → taxable income 864,000 ISK.
2. Bracket 1: 498,122 × 31.49% = 156,859 ISK.
3. Bracket 2: (864,000 − 498,122) × 37.99% = 138,997 ISK.
4. Tax before credit: 295,856 ISK; less 72,492 ISK = 223,364 ISK withholding.
5. Marginal rate 37.99%, average rate 25.9% of the base.

Changes between years

The thresholds are updated each new year under the Income Tax Act and published by Skatturinn in December. The rates change less often. This page shows tax year 2026; see figures for the overview and change log.