Iceland Approves New Weight-Based Mileage Tax, Replacing Fuel Tax from January 2026

Historic Shift in Icelandic Road Taxation

Reykjavik, Iceland – Iceland's parliament, the Althing, has officially approved a landmark decision to introduce a new weight-based mileage tax for all vehicles, effective January 1, 2026. This significant legislative change, passed under the government of Prime Minister Kristrún Frostadóttir, will abolish the long-standing fuel tax, marking a fundamental shift in how road use is financed across the country.

The new system aims to create a more equitable and sustainable funding model for road maintenance and infrastructure, particularly as the nation sees a growing adoption of electric and low-emission vehicles.

Understanding the New Mileage Tax Structure

Under the newly approved legislation, all vehicles, irrespective of whether they run on petrol, diesel, or electricity, will be subject to a per-kilometer charge based on their weight.

• For cars and SUVs weighing up to 3.5 tons, the charge will be 6.95 ISK per kilometer.
• Heavier vehicles, including buses, lorries, and trailers, will face progressively higher rates under a 29-band scale.

Payments for the mileage tax will be collected monthly through online banking, based on estimated mileage derived from previous records. Vehicle owners will be required to submit odometer readings at least once a year, with larger vehicles needing to report more frequently. Any discrepancies between estimated and actual mileage will be settled at the next vehicle registration, either through a refund or an additional charge.

Rationale and Expected Impact on Motorists

The primary motivation behind this tax reform is to offset the revenue losses from traditional fuel taxes as more Icelanders transition to electric vehicles. The government emphasizes that this ensures all vehicles contribute fairly to the upkeep of the roads they utilize.

The Icelandic Transport Authority anticipates that most motorists will experience an increase in running costs, estimated to be between 7% and 20%. However, owners of large SUVs could potentially see a decrease in overall costs, while drivers of smaller, more fuel-efficient cars might face higher annual expenses.

A significant consequence of abolishing the fuel tax is the expected sharp fall in petrol and diesel prices. The Icelandic Automobile Association (FÍB) projects that petrol prices could drop by more than 90 ISK per liter, and diesel by at least 80 ISK per liter. FÍB chairman Runólfur Ólafsson expressed confidence that these savings would be passed on to consumers, with pressure from trade unions, government bodies, and the Competition Authority to prevent fuel companies from absorbing the savings.

Implementation and Broader Context

The introduction of this comprehensive mileage tax system follows a similar charge that has been levied on electric and plug-in hybrid vehicles since early 2025, with rates of 6 ISK per kilometer for EVs/hydrogen vehicles and 2 ISK per kilometer for PHEVs. The new legislation extends this principle to all vehicle types, solidifying Iceland's position as a pioneer in distance-based road user charges.

For heavy trailers, the mileage charge will be introduced in phases, with full rates applying from 2028. This reform represents a substantial step towards a future-proof taxation system that aligns with environmental goals and ensures the long-term sustainability of Iceland's road network.