Tax and reductions
Tax and social insurance systems can seem complicated and difficult to keep up with. They can also affect your pension.
We want to keep our customers updated on how taxes and reductions might affect their savings.
A few facts about taxes and deductions
Social Insurance pension (TR) deductions and capital gains tax take into account income, not assets.
Withdrawing your private pension and interest gained has no effect on your Social Insurance pension (TR).
Submitting an income estimate to TR is important to ensure correct payment.
Capital gains tax applies to sales profits, dividends and interest. However, the tax authorities use a ISK 300,000 per year tax-free limit per person, but that does not apply to TR pension payments.
The deduction-free salary limit for TR is ISK 2,400,000 per year and ISK 200,000 per month.
How does interest affect my TR payments?
There is no capital gains tax-free limit at TR so all your interest and capital gains will affect your TR payments.
A TR pension is reduced by 45% due to all income, although there is a monthly ISK 25,000 deduction-free limit on total income and an additional ISK 200,000 for employment income. The housing supplement, which is paid to those who live alone, is reduced by 11.9% due to all income, e.g. capital gains.
- TR pension calculator (in Icelandic)
Do I have to pay 22% capital gains tax on all interest?
Yes and no. The tax-free limit on capital gains tax income is ISK 300,000 for individuals and ISK 600,000 per family, so we pay a lower effective tax rate when everything has been calculated and refunded. Any gains beyond the tax-free limit is subject to 22% tax.
Capital gains tax is paid when interest is paid, whereas the tax-free limit amount is repaid when you receive your tax settlement the following year.
Private pensions are not subject to capital gains tax.
No capital gains tax is paid on money invested in mutual and investment funds until the money is withdrawn.
TR deductions
How is my income affected?
A TR pension is reduced by 45% due to all income, although there is an ISK 25,000 tax-free limit on total income and an additional ISK 200,000 per month (ISK 2,400,000 per year) for employment income.
You should also submit an estimated income statement to TR. Go to the top right corner of the front page of www.tr.is and click on "My pages". Further instructions can be found below. Submitting this information could help prevent incorrect payments.
Speeding up or delaying TR payments
You must apply separately for a pension from Tryggingastofnun (TR) and it can take up to 5 weeks to receive payments.
Your signed application must be accompanied by an income estimate and confirmation that payments from the pension fund have been applied for.
You can apply for a pension from TR from the age of 65 to 80.
Those who choose to speed up or postpone their pension (based on the retirement age at any given time) may be subject to a permanent reduction or increase in rights at TR.
Applying for a pension once you have actually retired is often the best choice, as TR’s payments are income related.
Information and applications
Income tax on pensions
45%
Housing supplement deduction
11.9%
Deduction on private pension withdrawals
0%
Tax-free limit on total income per month
ISK 25,000
Tax-free limit on employment income per month
ISK 200,000
What if I move abroad?
Those who live in another EEA country retain their right to payments from TR, other than benefits that are considered social assistance.
If you intend to move to a country outside the EEA area, then you must contact the insurance fund in the country in question.
Prepaid inheritance
Prepaid inheritance is not taxed in the same way as when the estate is settled.
There is no tax exemption on prepaid inheritance and the spouse is not exempt from inheritance tax, which is currently 10%.
Prepaid inheritance may be paid to those who are entitled to an inheritance according to Icelandic inheritance law. An inheritance report must be completed, and inheritance tax paid before receiving the inheritance.
See your local district commissioner for further information.
Payments toward residential care
Participation in the costs associated with residential or nursing homes is income related.
Payment participation cannot exceed ISK 475.451 per month. If the monthly income of residents in a residential home exceeds ISK 107,165 after tax (per month), the excess income (up to ISK 582,616 after tax per month) goes towards payments.
The withdrawal of private pension savings does not affect participation in living expenses and the tax-free capital gains limit is ISK 98,640 per year and earned income ISK 1,315,200 per year, or ISK 109,600 per month.
These things can be quite complicated so make sure you contact TR and visit their website:
See the TR website for more information
Want to know more?
You can find further information here below. You can also chat with one of our advisors online or telephone our service centre.