Government plans to collect extra ISK 3.1bn in income tax

The Icelandic government expects to collect ISK 3.1 billion more in tax on individual incomes in 2027 than it otherwise would have, according to a budget proposal reported by mbl.is.

The increase follows a decision to suspend the productivity benchmark used to adjust personal tax credits and income tax thresholds next year. The proposal was presented by the finance minister on Monday.

Bjarni Benediktsson, director of Business Iceland, said the decision would increase the income-tax burden next year because the government was using weak productivity growth to halt the adjustment of tax thresholds.

The thresholds have been adjusted in line with inflation plus 1% productivity growth. “They now say that productivity is so low that they intend to remove this addition. This increases the tax burden on all middle-income earners,” Bjarni told mbl.is.

The personal tax credit and tax thresholds are intended to rise in line with wage developments caused by inflation and productivity growth, preventing people from gradually facing higher taxation solely because their wages increase.

The budget proposal says revised national accounts indicate that long-term productivity growth is lower than previously estimated. Productivity growth during the period covered by the current benchmark has also been below 1%.

The government says the persistent overestimation of productivity growth in recent years has contributed to the tax burden developing differently across income groups and falling for several years, although that was not the intention.

The revised estimate for productivity growth over the next five years is 0.5% per year. However, a transitional provision would set the productivity benchmark at 0% for the 2027 withholding-tax year, reflecting previous increases in the personal tax credit and tax thresholds that exceeded real productivity growth.

Based on the 5.2% inflation rate assumed in the proposal, the personal tax credit and tax thresholds will rise by 5.2% next year. In each of the following five years, they are expected to rise by 5.7%, consisting of 5.2% inflation and 0.5% productivity growth.

The personal tax credit will not fall in nominal terms. It will continue to rise with prices, but less than it would have if the previous productivity benchmark had remained in place.

The credit is ISK 72,492 in 2026 and is expected to reach ISK 76,262 in 2027, assuming the same inflation rate. Had the productivity benchmark remained unchanged, it would have reached ISK 76,987. Individuals would therefore receive ISK 725 less per month, or ISK 8,700 less per year, than under the previous benchmark.