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Personal tax discount to start following inflation

06.12.2021 - 15:42
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 Mynd: Kristinn Þeyr Magnússon - RÚV
People’s persónuafsláttur (tax-free allowance) will, from the start of next year, no longer be a set monetary value and will instead be linked to inflation and productivity growth. An economist with the ASÍ Icelandic Confederation of Labour says the change is welcome, though the trades unions would have liked the government to go even further to prevent automatic, de-facto tax rises.

Under the draft 2022 budget bill currently making its way through Alþingi, the change, linking the personal discount to external economic factors, instead of a fixed króna sum, will start on 1st January. ASÍ economist Arnaldur Sölvi Kristjánsson says the change is a step in the right direction. 

“The trades union movement has often pointed out this flaw in the tax system, that the tax burden has been raising year-on-year for a very long time, so we see it as very positive that this point-of-view we have had is being accommodated. This reduces what has been happening for many years in Iceland, that taxation automatically increases because the target amounts do not increase in line with wages,” Arnaldur says.  

He says the change is part of the agreements made in the ‘quality of life contract’ in 2019. Based on the development of inflation over the past four years, as well as a one percent increase in productivity, the personal tax discount would increase by 3.6 percent per year and would rise from around 51,000 krónur now to 58,500 in 2025. That means 58,500 krónur of people’s monthly income would be tax-free. 

“If we look back, the increase in wages has been more than one percent above inflation, and based on that, this problem will continue in the future, but to a lesser extent.” 

Unions have been calling for the personal discount to more closely track wages. If that was 5.1 percent over the past four years, as has been the case, then the tax-free personal discount would be 62,000 krónur in 2025 rather than the proposed 58,000, or the current 50,000. 

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