Payroll management comes with various challenges, including unique tax laws, processing methods, and termination policies. When you grow your company into Iceland, you’ll have to navigate these areas to remain compliant and ensure employees get the paychecks they deserve.
Taxation laws in Iceland
Iceland uses a progressive tax system based on monthly income. With its Pay-As-You-Earn (PAYE) model, employers deduct tax amounts from employee paychecks and send them to the country’s tax authority. The tax brackets are as follows:
- 31.45% for the first ISK 409,986 of monthly income
- 37.95% for monthly income between ISK 409,987 and ISK 1,151,011
- 46.25% for any monthly income over ISK 1,151,012
Along with income taxes, employers must contribute to a compulsory pension fund on behalf of employees. Employees contribute 4% of their earnings, and employers contribute 11.5%. Employees may also request additional contributions for optional pension schemes.
Iceland payroll options
Operating your company in a new country comes with the question of payroll management. You have a few options for processing payroll in Iceland, and they each offer varying levels of legal risk and use of company resources. Possible methods include:
- Iceland payroll processing company: A payroll processing company in Iceland will be familiar with the local tax laws. However, your business will remain liable for any mistakes the company makes.
- Internal: If you have an entity in the country, you can establish an internal payroll department. This option will give your company complete oversight, but you’ll need extensive company resources to create a subsidiary.
- G-P: With our Global Growth Platform™, companies can focus on ensuring successful business operations in Iceland while we handle the complexities of payroll setup and management. With us, companies can bypass entity setup and rest assured that all employees will be paid punctually and compliantly.
How to establish Iceland payroll
The payroll establishment process will look different depending on the method you choose. If you want to set up an internal payroll department, you’ll need to incorporate in the country first. This process involves registration with the government, which can take a few weeks.
Every payroll process will require tax and pension information. When hiring employees, you’ll need their tax identification numbers (TINs) and card IDs from their pension funds. These identification numbers will allow you to submit employee taxes and contribute to the necessary funds.
Termination and entitlement
Iceland’s employment laws do not require severance payments in any instance of termination. However, your industry’s Collective Bargaining Agreements (CBAs) may state otherwise. Companies are obliged to provide a certain notice period to terminate the employment relationship.
While severance pay is not typically required, the labor laws do describe required notice periods and vacation day payouts. If employees have unused vacation time, employers must pay the remaining balance for these days upon termination.
Streamline global payroll management with G-P.
G-P streamlines each step of the payroll management process with our market-leading Global Growth Platform™. Pay your team with confidence anywhere in the world in 150 currencies with our 99% on-time automated payroll system — all with just a few clicks. Our products also integrate with leading HCM solutions, syncing employee payroll data across platforms automatically to create one reliable, convenient source of truth for HR teams.
Contact us to learn more about how we can support you.