Iceland’s New Kilometer Road Tax: What You Need to Know

If you’re planning to rent a car in Iceland from 1 January 2026, you’ll notice a new government-mandated charge linked to road usage. This is the kilometre road tax, a national regulation that applies to all vehicles, including rental cars.

This isn’t a policy created by car rental companies. It’s a country-wide shift in how Iceland funds and maintains its road network. The role of rental companies is simply to apply the tax correctly, explain it clearly, and make sure your trip stays smooth and predictable.

This guide explains what the kilometre road tax is, why Iceland is introducing it, how it applies to rental cars, and what it means for your Iceland road trip.

Key Facts at a Glance

Until 2026, a large part of the cost of petrol and diesel in Iceland came from government fuel taxes. Those taxes helped fund road maintenance and transport infrastructure, and everyone paid them automatically at the pump.

From 1 January 2026, those fuel taxes were removed and replaced by the kilometre road tax. Because that tax is no longer built into the fuel price, petrol and diesel became noticeably cheaper.

Instead of paying road tax when you refuel, drivers now contribute through a separate distance-based charge linked to how much they drive. This applies to all vehicles — including rental cars — and all car rental companies in Iceland are required to collect it on behalf of the government.

At Lava Car Rental, we keep this simple by charging the kilometre road tax as a clear flat daily rate. That means no mileage tracking, no end-of-trip surprises, and you can focus on enjoying the drive.

What Is Iceland’s New Kilometre Tax?

The kilometre road tax is a usage-based road charge introduced by the Icelandic government to support the long-term maintenance of the country’s road network.

Before 2026, road funding in Iceland mainly came from fuel taxes included in petrol and diesel prices. Electric and plug-in hybrid vehicles, however, contributed far less under this system, even though they use the roads just as much.

As more drivers switch to electric and fuel-efficient vehicles, revenue from fuel taxes has dropped significantly. The kilometre road tax ensures that all vehicles contribute fairly, based on road usage rather than fuel consumption.

This tax is mandatory and applies to all car rental companies operating in Iceland. For a government-level explanation, you can also visit the official Our Roads to the Future website.

Iceland is widely considered a global pioneer in this approach, moving toward a nationwide distance-based road usage charge rather than relying on traditional fuel taxes.

Why Iceland Is Introducing This Tax in 2026

The Rise of Electric and Hybrid Vehicles

Iceland has one of the highest rates of electric vehicle adoption in Europe. While this is a positive environmental shift, it has significantly reduced revenue from fuel-based road taxes.

Challenging Road Conditions

Iceland’s roads face extreme weather, strong winds, freeze–thaw cycles, volcanic and glacial terrain, and heavy seasonal tourism. Maintaining safe and reliable roads across the country requires a funding model that works in the long term.

A Fairer System for All Drivers

By linking road contributions to actual usage rather than fuel type, the kilometre road tax spreads costs more evenly across all drivers.

How the Kilometre Road Tax Applies to Rental Cars

While the kilometre road tax is based on distance driven, rental car companies in Iceland can choose how they implement it. The tax can either be calculated per kilometre driven or applied as a flat daily fee based on average driving distances.

At Lava Car Rental, the tax is applied as a fixed daily rate. This is the simplest, clearest, and most traveller-friendly option, and it reflects how people actually explore Iceland.

How Much Is the Kilometre Tax?

Government Rate for Passenger Vehicles

For passenger vehicles under 3.5 tonnes — which includes the vast majority of rental cars in Iceland — the government-set rate is 6.95 ISK/kilometre driven, or around €0.047/km or $0.055/km.  

This per-kilometre rate is the basis of the kilometre road tax nationwide.

Lava Car Rental’s Flat Daily Rate

Instead of charging per kilometre, Lava Car Rental applies a flat daily road tax, with the amount set by Icelandic law. This legal rate is calculated by the authorities based on the average distance driven by travellers across the car rental industry. In Iceland, that average is around 200 kilometres per day.

Based on this figure, the kilometre road tax with Lava Car Rental is: 1,390 ISK/ day, or around €9.50/day or around $11/day. 

This daily rate stays the same whether you drive a little less or take the long scenic route. There’s no need to track kilometres, and there are no surprises at the end of your rental.

Fuel Prices in Iceland Before and After the Tax Change

To understand what the kilometre road tax really means for travellers, it helps to look at fuel prices before and after the new system came into effect on 1 January 2026.

Throughout 2025, petrol prices in Iceland were among the highest in Europe. Most drivers paid around 300–320 ISK/L for 95-octane petrol, depending on location and season. By the end of the year, average prices were hovering around 300 ISK/L (~€2/L or $2.38/L), which became a reasonable reference point for trip planning.

From 1 January 2026, traditional petrol and diesel taxes were removed and replaced by the kilometre-based road tax. This change had an immediate effect at the pump. In early January, petrol prices dropped by roughly 90–95 ISK/L at many stations across the country.

As of the first week of January 2026, petrol prices are now commonly found between 180 and 220 ISK/L, with an average closer to 200–210 ISK/L (~€1,36/L or $1,59/L) . That represents a reduction of roughly 30% compared with 2025, making fuel noticeably cheaper for drivers.

What This Means in Practice: A Real Driving Example

Rather than looking at fuel prices and road taxes separately, it’s more useful to see how they work together in real driving conditions.

Typical Daily Driving Costs (200 km per Day)

Example vehicle: Most popular rental car in Iceland (e.g. Dacia Duster)
Average real-world fuel consumption: ~7 L per 100 km

At a glance: the total cost of driving 200 km is essentially unchanged. You now pay less at the petrol station and contribute separately through a transparent road usage fee.

The Kilometre Tax Doesn’t Make Driving in Iceland More Expensive

For most travellers, the kilometre tax does not make driving in Iceland more expensive. It even makes it cheaper if your car consumes more than 7L/100 km. 

What has changed is how the cost is collected, not the overall amount. In practice, you pay a bit more through your rental and less at the petrol station.

Compared to guided tours, renting a car in Iceland still offers outstanding value and flexibility.

How Lava Car Rental Keeps This Simple with a Flat Daily Rate

Why Lava Car Rental Does Not Charge Per Kilometre

Per-kilometre charging can make a road trip feel more like watching a taxi meter than enjoying an adventure. Travellers often find themselves checking the odometer, second-guessing scenic detours, or worrying about unexpected costs at drop-off.

With a flat daily rate, you know the cost upfront and can drive as much as you like. Whether you take the long way around a fjord or stop at one extra waterfall (or three), the price stays the same.

That means total freedom on the road, without the mental maths.

Daily Rate vs Per-Kilometre Charging

A flat daily rate removes uncertainty and fits how people actually plan trips in Iceland.

Why a Daily Rate Is Fairer for Travellers

In Iceland, road trips are planned by days, not by kilometres.

Whether you’re doing a short Golden Circle loop, driving the full Ring Road, or exploring remote regions at your own pace, a daily rate ensures consistency and fairness. Two travellers renting the same car for the same number of days won’t end up paying wildly different amounts just because one followed a longer scenic route.

Electric and Hybrid Rental Cars

Electric and plug-in hybrid vehicles are not new to kilometre-based road taxation in Iceland. In fact, since 2025, these vehicles have already been subject to a distance-based tax to compensate for the fuel taxes they do not pay.

The change in 2026 is not about introducing a brand-new charge for electric and hybrid cars, but about aligning all vehicles under one unified system. From 2026 onwards, petrol, diesel, hybrid, and electric vehicles all contribute to road maintenance through the same kilometre-based framework.

For renters, the process remains straightforward. Electric and hybrid rental cars follow the same rules and pricing structure as other vehicles, with no additional steps, paperwork, or reporting required.

If you’re considering an EV for your trip, our guide to renting an electric car in Iceland covers charging, range, and route planning to help you decide if it’s the right fit for your itinerary.

Full Transparency From Booking to Return

Transparency is key when travelling somewhere new.

For bookings made in 2025 and travelling in 2026, the kilometre road tax is settled during the online check-in accessible a few days before arrival or at pick-up. The amount is clearly explained on arrival, with no hidden charges.

For bookings made from 1 January 2026, the kilometre road tax is included directly in the booking. This means the full cost is visible upfront when you book your rental car.

In all cases:

• The tax is handled automatically as part of your rental
• There is no tracking of your route or driving behaviour
• Rental companies do not profit from this tax; it is collected on behalf of the Icelandic government and passed through exactly as required by law

There are no hidden fees, no penalties for heavy usage, and no awkward conversations at drop-off.

What You Need to Do as a Traveller

There’s nothing extra you need to do to comply with the new law.

• If you booked your rental in 2025 and travelling in 2026, the kilometre road tax is paid during the online check-in a few days before pick-up or at pick-up. Everything is explained clearly when you collect your car, with no extra steps required.
• If you book on or after 1 January 2026, the kilometre road tax is included directly in the booking, so the full cost is visible upfront.

In both cases, there is no registration required and no paperwork at pick-up or drop-off. Your focus can stay where it should be: choosing the right vehicle and planning a safe route.

If you’re unsure whether your itinerary requires a larger vehicle, our guide on whether you need a 4x4 rental in Iceland can help. Before setting off, we also recommend reading our Driving in Iceland guide for practical tips, road conditions, and safety advice.

Final Thoughts

Iceland is best explored at your own pace, with the freedom to stop, detour, and adapt to changing weather and road conditions. The new kilometre road tax is simply part of maintaining the road network that makes that freedom possible.

For travellers, the experience remains the same:

• Open roads
• Epic landscapes
• Clear, predictable costs

Rent your car, enjoy the drive, and let Iceland do the rest.