As 2025 approaches, a host of tax updates is set to impact households and businesses alike. From tweaks to personal income tax brackets to new fees on nicotine products, here’s a breakdown of the key changes in a way that’s easy to understand and helps you plan ahead.
1. Changes to Personal Income Taxes
Good news for taxpayers: thresholds for personal income tax are increasing by 5.8% to account for inflation and productivity growth. While income tax rates remain the same, the municipal tax will see a slight uptick, with the weighted average rising to 14.94%.
- Example: The annual tax-free threshold will rise to ISK 2.6M in 2025, providing more breathing room for taxpayers.
2. Better Support for Families with Children
Families are set to benefit from higher child benefits, including prepayments for children born in 2025. Single parents and cohabiting parents will see increased thresholds and support amounts:
- Single parents: ISK 514,500 per child.
- Cohabiting parents: ISK 345,000 per child.
Additionally, younger children under 7 will receive an extra ISK 130,000 annually.
3. Income Tax Relief for Businesses
Business owners can breathe a sigh of relief as temporary 2024 tax hikes will be rolled back. Corporate income tax rates for public and private limited companies will drop from 21% to 20%, and partnerships from 38.4% to 37.6%.
4. New Taxes on Nicotine Products
If you use e-cigarettes, be prepared for new fees on nicotine products and refill liquids. The tax varies based on nicotine levels and ranges from ISK 8 to ISK 60 per gram or milliliter.
5. Carbon Tax and Fuel Levies
Environmental goals are driving up the carbon tax by a staggering 59%. Gasoline and diesel prices will also increase, with the special excise tax rising to ISK 55.65 per liter.
6. VAT Returns for Bicycles
Say goodbye to VAT exemptions for bicycles and electric scooters, which expire at the end of 2024. Expect a 24% VAT rate on these products starting January 1, 2025.
7. Accommodation and Cruise Ship Fees
Lodging taxes are set to increase for campsites, hotels, and other accommodations. Cruise ships will now pay an infrastructure fee of ISK 2,500 per passenger, replacing the lodging tax previously levied.
8. No Changes to Social Security Contributions or Subsidies
While social security contributions remain steady, the inheritance tax threshold will rise to ISK 6.5M, though the rate remains fixed at 10%.
9. Grants for Innovation Stay Strong
Businesses engaging in research and development will continue to enjoy tax deductions of up to 35% for SMEs and 25% for large companies, with a cap of ISK 1.1 billion annually.
Why These Changes Matter
These updates reflect the government’s dual focus on supporting families and driving sustainability, while also increasing revenue to fund infrastructure and social programs. Whether you’re a business owner, a parent, or a smoker, it’s crucial to stay informed and adapt to these shifts.
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