Iceland Payroll and Benefits Guide

What global businesses need to know about payroll in Iceland

Straddling the Eurasian and North American tectonic plates, Iceland is known for its volcanic, rugged landscape and its egalitarian approach to life. Economically, however, it doesn’t have the best reputation after the country was badly hit by the global financial crisis of 2008. The country had to be bailed out by the International Monetary Fund, although it has since recovered very well.

More than 40% of Iceland’s exports are from fishing, but it makes almost the same money from the production of aluminum, much of which is made sustainably. This country of fewer than 400,000 people is also a popular tourist destination, with people visiting from all over the world to experience the Blue Lagoon, the Gullfoss waterfall and the Northern Lights.

Quality of life and education levels in Iceland are high, but then so are wages and taxes. Collective bargaining is also a force to be reckoned with in the country, which adds further complexity from the perspectives of payroll and employment law. Read on for all the key facts about running payroll in Iceland.

Getting Started

You may find that much of the information and registration processes for businesses in Iceland are only available in Icelandic, and the availability of information in English can be patchy. The good news, however, is that Icelandic people are generally extremely friendly and it shouldn’t be difficult to find an expert to assist you.

If registering a private limited company, there is a minimum share capital requirement of ISK 500,000 (approx. £2900; $3600; €3350), although the main registration fee is rolled into this. To register as an LLC, a business will need to contact the Register of Limited Companies with their prepared memorandum of association, which must include the articles of association, stock price for shareholders, and requisite financial information.

Businesses are required to open in-country bank accounts, which can generally be established within four weeks. Companies must also go through the Population Registrar to receive an official ID number, and local government officials will help identify which licenses and permits are needed. Finally, businesses will need to report all earnings to the country’s Tax Department.

Employment Considerations

With two months of commencing work, employers must provide workers with a written contract of employment stating the basic terms of work, including location and wages. All workers in Iceland have access to unions, and collective bargaining is heavily relied upon to determine working conditions and wages. However, collective agreements are accepted as base terms for employment, and employees may negotiate additional terms or compensation in their individual agreements.

The standard working week in Iceland is 40 hours, spread across five eight-hour shifts, each of which will normally include a half-hour break for lunch. Overtime pay is slightly complex: for the first 162.5 hours of overtime each month, employees earn 0.875% of their monthly salary per hour worked. This increases to 1.0385% for hours beyond that, or 0.9375% for work between midnight and 7 am. 

Any overtime at weekends is subject to a minimum shift length of four hours for payment purposes, even if the employee works less than that in reality. Many salaried workers will take time off in lieu of overtime pay; in this situation, every hour of overtime work translates to one hour and 40 minutes of holiday time.

Notice periods are three months, unless contractually specified otherwise. Probation periods are normally a maximum of three months and are governed by collective bargaining.

Compensation, Bonuses & Severance

There is no statutory minimum wage in Iceland; wages are instead decided by collective bargaining and contractual negotiations. Any collective agreements for certain industries apply to all employees in that industry, including those who aren’t union members. The average wage in Iceland is relatively high, at ISK 808,000 per month (approx. £4600; $5900; €5400). Employees are typically paid monthly on the first of the month and must be given a payslip with full itemized details of payment and deductions.

Employees receive two bonuses during the year. The first should be paid before the employee takes their summer holiday, and should be 10.17% of the level of their salary. The second is a Christmas bonus, that should be paid on December 1 and is fixed at ISK 82,000 (approx. £470; $595; €550).

Similar to the minimum wage, there is no legal requirement for severance pay, but it is commonly negotiated through collective bargaining.

Tax and Social Security

There are two types of employee-specific tax in Iceland. Municipal tax is applied at a flat rate of 14.67%. Then, income tax is applied progressively across three bands. The first ISK 5,353,634 earned per year (approx. £30,700; $38,900; €35,800) is taxed at 16.78%, after which a rate of 23.28% applies. The highest rate of 31.85% applies on all earnings over ISK 15,030,014 per year (approx. £86,000; $109,000; €101,000).

Corporation tax on limited-liability companies is 21%. VAT is 24%, although a number of goods and services are subject to a reduced rate of 11%, notably including hotel accommodation and tourist transport services.

The only social security contribution employees have to make is 4% into the pension fund. Employers must pay 11% into that fund, plus an extra 2% if an employee voluntarily commits an extra 2-4% of their own. Employers should also pay 6.1% social security, 1.55% union fee, and 0.1% into the rehabilitation fund.

Holidays and Leave

Employees in Iceland accrue two days of paid leave for every month they work, for a total of 24 days per year. However, employees are expected to take all their holidays in one block, somewhere between the beginning of May and the middle of September. This can be altered with prior employer agreement, or through collective bargaining. There are also 15 days of public holidays in Iceland each year.

Iceland is one of the only countries around that treats maternity and paternity leave exactly the same. Each parent gets six months of leave, paid by social security at 80% of salary, with a maximum cap of ISK 600,000 per month (approx. £3400; $4350; €4000). Up to six weeks of a parent’s allocation can be transferred to the other parent. Each parent also has the right to take one block of 13 weeks of parental leave, unpaid, before the child turns eight.

Sick leave entitlement varies according to length of service, starting at two months per year after one year of service, rising to four months after five years, and six months after ten years. Rules around sick pay are largely determined by collective bargaining; although social security payments kick in if an employee has been off for longer than three weeks continuously.

In Summary

What this guide makes clear is that collective bargaining has a major role to play on many fronts when it comes to payroll and employment in Iceland. That means that the arrangements that you’ll have to deal with may vary substantially compared to other foreign businesses there. It’s for that reason among others that accessing Iceland-specific expertise is vital, including working with a global payroll partner.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.

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