Mileage allowances and car reimbursement rates in Iceland (2026)

Updated: April 2026

Iceland! A tiny but mighty European country with some breathtaking roads and bustling business hubs. Reykjavik has just 138,000 residents, but it’s strategically placed between Europe and the US, making it an ideal location for many businesses. 

Whether you’re based in Iceland or just visiting, you will likely benefit from their government subsidy schemes for both mileage rates and per diem allowances. In this article, we’re going to explore the ins and outs of the Icelandic system, from kilometres covering to international trip allowances.

Buckled up? Let’s go. 

How does mileage allowance work?

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.

What are the mileage allowance rates in Iceland in 2026?

The maximum available deduction from the car allowance is ISK 83 to ISK 145 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:

Source 

Any verified operating costs incurred by the employee while using their vehicle for business purposes are deductible from the car allowance provided by their employers. However, in order to qualify for the deduction, it’s essential that the employee keeps a daily driving log detailing costs and usage.

What is not included in the mileage allowance?

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.

Employee use of a company car

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

1. Full and unlimited use: the employee can use the company car for their own purposes—for example, family trips or shopping. 

   The annual income is calculated as 28% of the initial purchase price of the vehicle as stated in the employer’s depreciation report for vehicles powered by fossil fuel and 25% for vehicles powered by electricity, hydrogen or methane. The purchase price can be reduced by 10% annually down to 50% of the purchase price. This only applies to vehicles purchased in 2014 or later.

   If the employee pays the operation expenses himself the percentage is reduced by 6% for vehicles powered by fossil fuel and 3% for vehicles powered by electricity, hydrogen, or methane.

2. Limited use: an employee using a company-provided vehicle for limited use (i.e. commutes or business-related errands) is deemed to have received income from the employer. In 2026, this income stands at ISK 145 for each kilometre driven. 

Per diems in Iceland for 2026

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: 

Source

Per diem payments for international travel:

Source

Road tax fee in Iceland

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. As of 2026, the following per-kilometre road tax rates apply:

Fee amounts:

• 6 ISK per kilometre for electric cars and hydrogen cars

• 2 ISK per kilometre for plug-in hybrids

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.

How to log the odometer reading

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.

Streamline your corporate travel plans with Perk's business travel management platform

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 Perk.

By choosing from the vast selection of third-party integrations offered by Perk, 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!

See how to save your company time and money on business travel.

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Frequently asked questions about mileage allowance in Iceland