Mileage allowances and car reimbursement rates in Iceland (2024)

If an employee is using a private vehicle to rack up business mileage, they can claim a tax-free reimbursement from their employer based on the state-defined mileage rates. This amount is used to cover any expenses incurred during the journey, such as fuel or repair costs. Each country has its own system, and it is the responsibility of the employer to cover these expenses. To ensure you’re staying compliant and not risking a shock at the end of the tax year, it’s important for employers and employees to be clued up. It’s also not just the flat rates that can change, but also the type of vehicle used and distance covered.With huge potential to benefit both employers and employees, it’s important to know exactly how the system works in the country your employees are travelling in.Let’s take a look at the Icelandic rates.

The maximum available deduction from the car allowance is ISK 83 to ISK 141 per km—this amount may vary during the year.According to

Skatturinn

, Iceland’s National Tax Agency (the equivalent to HMRC) the current mileage rates are as follows:

In Iceland, you are not eligible for mileage reimbursement if the vehicle allowance was paid for the employee's journey to and from work (i.e. their commute) or for other uses of the vehicle that are considered for his personal (i.e. not job-related) use.

In cases where employees are provided with a vehicle by their employer, it will either be on the condition of limited or unlimited use. 

Per diem payments cover employee travels outside the workplace specified in their contract. These payments should cover the employee’s expenses incurred by being away from home, including accommodation and food costs. Many businesses and their employees prefer a flat rate per diem to the more tedious alternative of submitting itemised expenses.In Iceland, employees can report deductions against the per diem payments as stated in the Principal Tax Rates published by the

Internal Revenue Directorate

. Tax does not have to be withheld from per diem payments as long as the payments are not higher than stipulated in the Principal Tax Rates. If the payments are higher, the difference is liable to withholding taxes (WHT).Per diem payments for domestic travel: 

If you are driving a personal or rental vehicle in Iceland, a per-kilometre fee is paid for driving electric cars, hydrogen cars, and plug-in hybrids—but not for hybrid vehicles that don’t connect to an electrical outlet. The fee applies to passenger cars and vans and is collected monthly from the registered owner of the vehicle.The purpose of this fee is to maintain state revenue despite the steadily reducing income from petrol and diesel tax as electric cars become more popular. There are plans to introduce fees for diesel cars from 2025.Fee amounts:The distance travelled is measured by an odometer. The odometer reading should be logged into the system at least once a year, but can be logged every 30 days. Keeping a consistent log ensures that you pay based on average kilometres travelled, which is calculated using your two most recent odometer readings. It also helps you avoid overpaying at the end of each month—or receiving an underpayment penalty at your next odometer reading.A reading that is logged on the last day of the month takes effect the following day.

When it comes to paying your road tax, it’s a similar system to utility bills for electricity and hot water. You log the odometer reading regularly, and the tax is billed monthly to the vehicle owner's bank account. If the owner doesn’t submit a regular kilometre report then the bill is based on average km relative to the specific vehicle type.

That’s the lowdown on driving for business purposes in Iceland. Here’s a bonus tip—it’s essential to use winter tyres from 1st November to 15th April. You might get a fine of 20,000 ISK (€133,97) per tyre for using studded tyres after the winter dates end in April.It’s also worth remembering that Icelandic hire car companies often have stricter requirements for their customers, such as years of driving experience, a higher minimum age and holding an International Drivers Permit, if you’re coming from the United Kingdom, for example.When it comes to

managing employee travel

, the easiest and most efficient way to keep track of employee movements and expenses is to integrate a dedicated business travel management platform—like TravelPerk.By choosing from the vast selection of third-party

integrations

offered by TravelPerk, including firm favourites like Ramp and Pleo, you can rest easy knowing your company travel is under control and on the move—to Iceland and beyond!