Taxing Wages 2018

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 2017, ISK 106.82 was equal to USD 1. That year, the average worker is expected to earn ISK 8 903 714 (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 634 880 in 2017, 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 may utilise up to 100 of each spouses’ unutilised portion of his/her basic tax credit.

• 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 2017 is ISK 400 000 for a single person, ISK 500 000 for a single parent and ISK 600 000 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 800 000 for an individual, ISK 1 000 000 for a single parent and ISK 1 200 000 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 4 500 000 for a single individual and a single parent and ISK 7 300 000 for a couple and are eliminated altogether at a 60% higher amount, or ISK 7 200 000 and 11 680 000, respectively. (These amounts are based on income in the year 2017 but are paid out in 2018. These numbers are estimates; final figures will be available once the 2018 budget has been passed).

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 double-rated. The central government income tax rate in 2017 is 22.5% for income up to ISK 834 707 per month. For income exceeding ISK 834 707 the tax rate is 31.8%. The income tax rate applies to all personal income in excess of ISK 149 192 per month (ISK 1 790 304 per year). Tax relief is provided by the basic credit described in Section 1.1.2.1.

The tax on capital income is 20%. It is levied on all capital income of individuals, such as interest, dividends, rents etc. Interest income up to ISK 125 000 per year and 30% of income from rent of residential property is tax free.

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 average rate in 2017 is 14.44%.

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 11 197 in 2017, provided the individual’s taxable income is at least ISK 1 718 679 for the year. This tax will be collected in 2018.

Fee to the broadcast media: 16 to 70 year-old individuals with taxable income over ISK 1 718 679 for the year are subject to a fixed tax of ISK 17 200 in 2017, which will be collected in 2018.

These amounts are estimates and thus subject to change as the fees are payable in 2018.

2.2. Employers’ contributions

Employers have to pay a social security tax on total wages of 6.85%. In addition, 0.65% is levied on the wages of fishermen as a premium for their government accident insurance. Furthermore, a new financial activities tax was introduced in 2012, which requires financial and insurance companies to pay an additional 5.5% payroll tax in 2017.

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 2016 they are as follows (in ISK per year):

• For each child under the age of seven: 122 879

• Children under the age of eighteen at the end of 2017:

  • First child: 205 834

  • Each additional child: 245 087

• Benefits for single parents:

  • First child: 342 939

  • Each additional child: 351 787

• Income threshold for benefit curtailment:

  • For couples: 5 400 000

  • For a single parent: 2 700 000

• 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%

Note that child benefits in this Report are based on income in the year 2017 but are paid out in 2018 (see also section 4.4). These numbers are estimates and thus subject to change.

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%. 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 1997-2016

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 again but now to double rated. The rates are 22.5% for income up to 834 707 per month and 31.8% for income higher than 834 707 per month; 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	22.50	14.44	36.94	9.3

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; 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 2009-17, benefits are as follows (in ISK per year):

 

	2010	2011	2012	2013	2014	2015	2016	2017
For all children under the age of seven	61 191	61 191	100 000	100 000	115 825	119 300	122 879	122 879
Children under the age of eighteen:
First child	152 331	152 331	167 564	167 564	194 081	199 839	205 834	205 834
Each additional child	181 323	181 323	199 455	199 455	231 019	237 949	245 087	245 087
Benefits for single parents:
First child	253 716	253 716	279 087	279 087	323 253	332 950	342 939	342 939
Each additional child	260 262	260 262	286 288	286 288	331 593	341 541	351 787	351 787
Income threshold for benefit curtailment:
For couples	3 600 000	3 600 000	4 800 000	4 800 000	4 800 000	4 800 000	5 400 000	5 400 000
For a single parent	1 800 000	1 800 000	2 400 000	2 400 000	2 400 000	2 400 000	2 700 000	2 700 000
Curtailment of benefits under the age of seven:
For each child	3%	3%	3%	3%	4%	4%	4%	4%
Curtailment of benefits under the age of eighteen:
For one child	3%	3%	3%	3%	4%	4%	4%	4%
For two children	5%	5%	5%	5%	6%	6%	6%	6%
For three children or more	7%	7%	7%	7%	8%	8%	8%	8%

The data for 2017 is subject to change as the benefits are not payable until 2018.

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 2005-07. 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 2010-11; 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.

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, generally linked to unions and employee associations. The private pension funds are not part of the government-run social security system, to which a payroll tax is paid as described under section 2.2 above. Compulsory and voluntary payments to such funds are described in section 4.1 above.

Iceland

2017 parameter values

Average earnings/yr	Ave_earn	8 903 714	Secretariat estimate
Pension rate for tax allowance	pension_rate	0.04
Tax credit	Basic_crd	634 880
	Married_propn	1
Central income tax	tax_sch	0.225	10 016 488
		0.318
Special tax	special_rate	0
threshold	special_thrsh
Local tax	local_rate	0.1444
Church tax	church_tax	0
Social Security Contr.	SSC_fixed	28 397
	SSC_thrsh	1 718 679
Employer SSC	SSC_empr	0.0685
General child allowance:
child allowance	CA	122 879
Maximum number of children under 7	max_child_under7	1
Supplement child allowance:
Married couple case
first child	SA_first_m	205 834
other children	SA_others_m	245 087
income threshold	SA_tresh_m	5 400 000
Single parent case
first child	SA_first_s	342 939
other children	SA_others_s	351 787
income threshold	SA_tresh_s	2 700 000
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

2017 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)
		special_tax	J	0
7.	CG tax	CG_tax	B	CG_tax_excl-tax_cr+special_tax
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	Positive(MIN(Children,max_child_under7)*CA-Positive(inc_total*(1-pension_ rate)-IF(Married,SA_tresh_m,SA_tresh_s))*SA_redn_1) +(Children>0)*(IF (Married,SA_first_m+ Positive(Children-1)*SA_others_m,SA_first_s+ Positive (Children-1)*SA_others_s) Positive(inc_tot*(1-pension_rate)-IF(Married,SA_ tresh_m,SA_tresh_s))*IF(Children=’1,’ SA_redn_1,IF(Children=2,SA_redn_2, SA_redn_3)))
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.