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, 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

Starting January 1, 2026, Iceland will implement a universal kilometer tax. Unlike previous systems that heavily relied on taxes built into the price of fuel, this new regulation charges drivers based directly on their road usage.

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

Transparency is key to a stress-free car rental experience. We want to ensure you know exactly what costs to anticipate.

For all vehicles under 3.5 tons—which includes the vast majority of our rental fleet, from economy cars to large SUVs—the rate is set at ISK 8.81 per kilometer.

It is important to note that this rate is all-inclusive regarding the tax itself. It covers the government levy as well as the necessary administration and collection fees associated with processing the payment.

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

This amount would be charged to your card upon the return of the vehicle.

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 an unforgettable experience, and we want you to focus on the Northern Lights and waterfalls, not administrative details. Here is a quick recap of what to remember for your trip after January 1, 2026:

• Lower Fuel Costs: Enjoy significantly cheaper prices for petrol and diesel at gas stations across the country.
• Pay-Per-Kilometer: Be aware that a government tax of ISK 8.81 per km applies to your total distance driven.
• Automatic Payment: Holdur will calculate and process this fee from your credit card when you return the vehicle.

This new system ensures fairness and sustainability for Iceland’s roads, helping us keep the route to your next adventure in top condition. If you have any questions about how this tax applies to your specific booking, our team is always ready to assist you.

Safe travels and enjoy the drive!