Payroll in Iceland

Iceland pays monthly, and the payment date comes from the applicable agreement. Under VR/SA, monthly wages are paid on the first day after the month worked. If that day is a holiday, payment moves to the last working day of the month.

Keep the payday and the tax deadlines apart in your head. The payday is a contractual promise to your employee. The tax deadlines are set by the authority, and they run on their own calendar.

Payslips

Give the employee an itemised payslip with each payment. Under VR/SA it should show:

Remittance deadlines

The 2026 PAYE guidance requires you to submit and pay income tax withholding by the fifteenth of the following month. If that date falls on a weekend or holiday, it moves to the next working day.

Employer payroll tax normally follows monthly periods too, with a due date on the first and a final deadline fourteen days later. Check the current schedule with Skatturinn, the tax authority, when you set up your calendar.

Working hours and what they mean for pay

The statutory working week is 40 hours, but do not assume every hire works that schedule. Agreements separate active work from time that includes paid coffee breaks.

After-hours work and overtime are different things

VR/SA treats work outside the daytime period as after-hours or night work up to a monthly limit. That limit is 159.27 hours for office and sales staff and 167.94 hours for shop staff. Only work beyond the limit counts as overtime. The overtime hourly rate is 1.0385% of fixed monthly wages.

You also need a working-time system that is objective, reliable and accessible. Regular contractual hours can form the record where permitted, with deviations recorded separately. Employees must be able to see the preceding twelve months.

Income tax in Iceland is withheld at source every month. The withholding rate combines state income tax and the average municipal tax, so you deal with one set of bands rather than two separate taxes.

2026 withholding bands

How to calculate withholding

• Start with gross taxable pay.
• Take off permitted pension deductions. That is the ordinary 4% employee pension contribution, plus up to a further 4% for qualifying, regularly paid supplementary contributions.
• Apply the three bands to what is left.
• Subtract the employee's available personal tax credit.

The personal tax credit

The standard 2026 personal credit is ISK 72,492 per month, and the published annual amount is ISK 869,898. Whether an employee can use it in full depends on their circumstances and period of entitlement.

If someone has more than one source of income, coordinate how the credit is used across them and apply the right combined-income band. And remember that withholding uses the average municipal rate, so the final municipal assessment can come out different.

Worked example: net pay at ISK 700,000

Here is how the numbers run for an employee on ISK 700,000 gross a month, using the ordinary 2026 bands and a full personal credit.

Personal tax status and supplementary pension saving can change the result. Union fees and any other employee deductions come off after this.

Budget two core costs first: payroll tax and the employer share of pension. Then add whatever the agreement requires. These items have different bases, so do not just add the percentages together.

Payroll tax: 6.35% in 2026

The ordinary employer payroll tax rate is 6.35% in 2026. It is collected together with the associated wage-guarantee and market charges. Its base includes taxable remuneration and your pension contribution, which is why pension pushes payroll tax up.

Special industries and cross-border insurance certificates can change the charges that apply. Pension, agreement funds, insurance and benefits are not included in the 6.35% and must be budgeted separately.

Pension

Pension insurance is generally mandatory from age sixteen to seventy. The statutory minimum total contribution is 15.5% of the pension contribution base. The split between employer and employee comes from the applicable agreement or special law. Under the VR/SA example, the employee pays 4% and the employer pays 11.5%.

Record the correct pension fund in the employment documentation. Different agreements point to different funds.

Supplementary pension match

Under VR/SA, if an employee makes an additional personal pension contribution of 2 to 4%, you match it with 2%. That match also feeds into the payroll tax base.

Agreement funds

Agreements can add fund contributions. VR's current guidance for wage payers lists these employer contributions:

Apply each fund's own rules and contribution base, and check for any extra obligations in the agreement. The 0.7% VR membership fee is a deduction from the employee's pay. It is not another employer cost.

Accident insurance

VR/SA requires occupational accident insurance covering specified death and disability risks, including the normal commute and travel the employer directs. Report workplace accidents through the required authority and insurer processes.

Worked example: employer cost at ISK 700,000

This uses an 11.5% employer pension, as in the VR/SA example.

Leave in Iceland hits payroll in three ways: holiday pay you fund, sick pay you owe for a set period, and agreement bonuses with fixed dates. Parental leave pay mostly comes from a public fund, not from you.

Annual leave and holiday pay

The statutory minimum is two working days of leave for each month worked in the preceding holiday year. For a full year that is ordinarily 24 days. The holiday year runs from 1 May to 30 April.

Holiday pay is at least 10.17%. It is an employee entitlement that you fund. It is not a 10.17% deduction from the agreed wage.

Scheduling leave

The statutory summer holiday period is 2 May to 15 September. Agree timing with the employee, taking their wishes and your operational needs into account, and normally give at least a month's notice before leave starts. Agreements can improve on this. VR provides twenty consecutive summer working days and compensation rules if you require leave outside the season.

Public holidays

VR distinguishes fourteen full public and major holidays from the holiday periods that start at noon on Christmas Eve and New Year's Eve. The full days are:

• New Year's Day
• Maundy Thursday and Good Friday
• Easter Sunday and Easter Monday
• First Day of Summer
• 1 May
• Ascension Day
• Whit Sunday and Whit Monday
• 17 June
• The first Monday in August
• Christmas Day and Boxing Day

These are not sixteen extra working days off. Some fall on weekends, and what you pay someone who works on a holiday depends on the agreement.

Sick leave

In the first year, the law gives two paid sick days earned for each month worked. Agreements can give more. Under VR, the entitlement grows with service:

Employees should report sickness promptly. If you ask for a medical certificate, VR says you pay for it. Transferred service and re-employment can preserve enhanced rights. When your sick-pay obligation ends, union fund or public benefits may be available under their own rules, so do not promise unlimited full salary.

Maternity and paternity leave

Each parent ordinarily has six months of leave, and up to six weeks of one parent's entitlement can be transferred to the other. The leave is used before the child turns twenty-four months. The parent giving birth must take at least the first half-month after the birth. Adoption and permanent foster care have corresponding rules.

The fund pays eligible employees 80% of average gross earnings over the relevant twelve-month period, which ends six months before the birth month. For leave used from 1 January 2026:

• Monthly maximum: ISK 900,000
• Minimum for 50 to 100% work: ISK 275,688
• Minimum for 25 to 49% work: ISK 207,708

These rules do not automatically require you to top up to full salary. Check the contract and agreement. Separate unpaid parental leave also exists, recorded by island.is as 17.3 weeks.

Agreement bonuses

There is no single national thirteenth-month salary, but agreements carry bonus obligations. The VR/SA example includes:

• A full-year December bonus of ISK 114,000, due by 15 December 2026
• A holiday bonus of ISK 62,000, due 1 June 2026

Eligibility, service and part-time rules decide the actual amount. Both bonuses already include holiday pay, so do not add another holiday-pay percentage on top.

Most compliance mistakes in Iceland come from applying one national table where the agreement should decide. Pay, notice, hours and probation all depend on the agreement, so get that right first.

Minimum pay

Iceland does not have one national statutory minimum wage amount. Minimum pay and conditions come from collective agreements for the relevant occupation and area, and they protect workers regardless of nationality or length of employment.

As an example, under the VR/SA wage table effective 1 April 2026, the starting monthly rate for an office worker is ISK 515,868. After three years in the profession it is ISK 542,218. These are examples under that one agreement, not a national minimum or a salary recommendation. Other jobs, grades and agreements pay different rates.

Probation and notice

For indefinite employment under VR/SA, notice depends on how long the employee has been with you:

After ten consecutive years with the same company, employer notice rises to four months at age fifty-five, five months at sixty and six months at sixty-three. Employees with those extended rights can still resign with three months' notice. Otherwise, notice is the same both ways.

Other agreements may differ. Do not present a universal six-month probation, and do not assume you can dismiss someone immediately without notice and the protections that apply.

Final pay

When employment ends, budget for:

Severance does not automatically start after twenty-four months of service. Ordinary VR termination guidance provides notice and accrued payments. Whether more is owed depends on the contract, agreement, any settlement and the circumstances, including whether a dismissal was unlawful.

Working time and rest

• Weekly ceiling: an average of forty-eight hours a week, including overtime, over four months. Authorised agreement arrangements can extend the reference period.
• Daily rest: at least eleven consecutive hours in every twenty-four.
• Weekly rest: one day off a week, attached to daily rest.
• Breaks: work lasting more than six hours requires a break, set through the relevant agreement.

Statutory exceptions and compensatory rest rules exist, but they are not permission to schedule unlimited overtime.

Protection during parental leave

Employment continues through maternity, paternity and parental leave. The employee returns to the same job, or a comparable job under the contract if that is impossible. Dismissing someone who is pregnant, has recently given birth, or has notified or is taking protected leave requires valid reasons and written justification. The leave itself is never a lawful reason.