Iceland's New Kilometer-Based Road Tax: Everything You Need to Know

Planning a road trip around Iceland’s stunning Ring Road or exploring the hidden gems of the Westfjords? If your travel dates fall on or after January 1, 2026, there is an important update regarding driving regulations you need to know.

The Icelandic government is introducing a new kilometer-based road tax system. This change shifts how drivers pay for road usage, moving away from fuel-based taxation to a fairer system based on actual distance driven. For our customers at Holdur - Europcar Iceland, this means a slight adjustment to how rental costs are finalized, but it also comes with good news at the fuel pump.

This guide breaks down exactly what the new regulation entails, how it impacts your rental experience, and what you can expect when you hit the road in 2026.

Understanding the New Road Tax Regulation

Effective January 1, 2026, Iceland introduced a new per-kilometer road tax applicable to all vehicles, spanning electric and plug-in hybrid (PHEV) models as well as traditional petrol and diesel cars. With the per-kilometer charge, payment is based on actual road usage, measured by kilometers driven rather than fuel consumption.

The philosophy behind this change is modernization and fairness. As vehicles become more efficient and electric cars become more common, fuel taxes alone no longer cover the cost of maintaining Iceland’s extensive road infrastructure. This new system ensures that every vehicle contributing to wear and tear on the roads—whether it runs on electricity, diesel, or petrol—pays its fair share.

Which Vehicles Are Affected?

The short answer is: all of them. The new regulation applies to every passenger vehicle regardless of its power source.

Whether you rent a compact electric vehicle (EV) for city driving in Reykjavík, a rugged diesel 4x4 for the Highlands, or a plug-in hybrid (PHEV) for a mix of efficiency and range, the kilometer tax applies.

How the Tax is Calculated

The calculation is straightforward. You pay for what you use. The tax is determined solely by the distance you drive during your rental period.

• Measurement: The odometer reading at the start of your rental is compared to the reading when you return the vehicle.
• Charge: The total number of kilometers driven is multiplied by the per-kilometer tax rate.
• Payment: This fee is handled as a separate charge, processed via your credit card at the end of your trip.

The Current Tax Rate Explained

For vehicles and SUVs up to 3.5 tons, the total kilometer-based charge is made up of two components:

Item	Rate (per kilometer)
Government Road Tax	ISK 6.95
Holdur Administration Fee	ISK 1.50 (ISK 1.86 including VAT)

 

• Government Road Tax: This fee is set by the Icelandic government and applies to all road users.

• Holdur Administration Fee: This covers the necessary operational costs for processing payments, submitting mileage reports, and ensuring full compliance with local regulations. The fee including VAT is ISK 1.86 per kilometer.

These charges are displayed on your final invoice to provide complete transparency, allowing you to see precisely how your road usage costs are calculated during your rental.

A Practical Example

Let’s say you rent a car for a 10-day trip around the Ring Road and drive a total of 1,500 kilometers.

• Total Distance: 1,500 km
• Rate: ISK 8.81 / km
• Total Tax Calculation: 1,500 * 8.81 = ISK 13,215

At the end of your trip, a pre-authorization charge will be applied to your credit card. The tax is calculated based on the distance driven during your rental. Please note that it may take up to five business days for the pre-authorization hold to be released and the remaining balance returned.

Good News: Significant Drops in Fuel Prices

While the introduction of a new tax might sound like an added expense, the Icelandic government has structured this change to balance out for drivers. To offset the new kilometer tax, specific excise duties on fuel have been removed.

This results in a significant reduction in the price you pay at the pump. When you fill up your rental car, you will notice that the cost per liter is considerably lower than in previous years.

Estimated Savings at the Pump

The removal of these duties leads to approximate price decreases as follows:

• Petrol: A decrease of approximately ISK 94 per liter (roughly EUR 0.64 / USD 0.75).
• Diesel: A decrease of approximately ISK 87 per liter (roughly EUR 0.59 / USD 0.69).

This reduction helps balance the overall cost of operating a vehicle. While you will pay a fee at the end of your rental based on mileage, your daily running costs for fuel will be significantly lower.

How This Impacts Your Holdur Rental

At Holdur, we strive to make every step of your journey seamless. Here is how we are integrating this new regulation into our rental process to ensure it is easy for you.

1. Transparent Billing

When you book your car, the base rental price remains the same. The kilometer tax is not a hidden fee but a government-mandated post-rental charge. We will clearly outline this during the booking and pick-up process so there are no surprises.

2. Automatic Processing

You do not need to register with any government agency or fill out complex tax forms. We handle the administration for you. We record the odometer reading when you pick up the car and again when you drop it off.

3. Payment Method

The tax will be charged to the credit card on file via pre-authorization at the end of your rental agreement. This happens automatically when we close out your contract, ensuring you don't have to worry about making a separate manual payment.

Why the Change Matters for Iceland

Iceland is known globally for its pristine nature and commitment to sustainability. This new tax structure supports those values.

By moving to a kilometer-based system, the country secures necessary funding for road maintenance and improvements without penalizing the adoption of eco-friendly vehicles. Electric vehicles, which previously paid little toward road upkeep because they don't use fuel, now contribute fairly.

Furthermore, by lowering fuel costs, the government is reducing the immediate financial burden of filling up the tank, making the transition smoother for those driving traditional combustion engine vehicles.

Summary for Travelers

Driving in Iceland is truly special, and our goal is to handle the administrative details so you can focus on exploring the country’s natural wonders. Here’s what to keep in mind for rentals starting January 1, 2026:

• Lower Fuel Costs: Take advantage of notably reduced prices for petrol and diesel at service stations.
• Pay-Per-Kilometer: The government road tax plus administration fee is calculated at ISK 8.81 per km for your rental’s total mileage.
• Automatic Payment: Holdur will calculate and process this km-based fee using your credit card at the end of your rental.

Please note that the kilometer tax does not cover all driving-related expenses. You will still need to pay for other costs, such as tunnel tolls (like the Vaðlaheiðargöng tunnel), parking, entrance fees for attractions, and any traffic fines you may receive.

This system supports sustainable travel while ensuring fair and reliable road funding. If you have questions about how these charges apply to your booking, our team is always available to provide assistance.

Safe travels and enjoy the drive!